After a 20% decline year-to-date, at the current price of around $119 per share, we believe Target (NYSE: TGT), the second-largest discount chain in the U.S. – could see gains in the longer term. TGT stock has declined from around $149 to nearly $119 YTD, compared to a 14% growth in the S&P index. The stock decline during this period can be attributed to shifting consumer sentiment and slowing company sales. Consumers are still pulling back on discretionary purchases. Target’s
TGT
Q2 revenue fell 5% year-over-year (y-o-y) to $25 billion due to a 5.4% decline in comparable sales. Further, comparable digital sales also fell 10.5% in Q2. However, the retailer lapped a period with unusually high inventory levels in the year-ago quarter and made progress on initiatives to improve its gross profit margin. Same-day fulfillment services, a longtime source of strength for the company, was up 4% with a 7% increase in Drive-Up. TGT reduced its inventory by 17% y-o-y, which helped drive gross margin up from 21.5% in Q2 2022 to 27% in Q2 2023. Consequently, Target’s operating income improved by 360 basis points to 4.8% and adjusted earnings per share quadrupled from $0.39 in Q2 2022 to $1.80 in Q2 2023. Having said that, the company’s next few quarters could show sluggish sales trends that reflect weak demand for some key product lines. We expect the company shares to likely remain under pressure in the short term.
Notably, TGT stock had a Sharpe Ratio of 0.5 since early 2017, which is slightly lower than the figure of 0.6 for the S&P 500 Index over the same period. Compare this with the Sharpe of 1.2 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
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