The costs squeezing nearly every retailer are starting to resolve for Target as the chain discovers areas to grow, even during an economically challenging period, Jefferies said. Analyst Corey Tarlowe upgraded the stock to buy from hold with an increased price target of $185 from $170. The new forecast implies an upside of just under 24% over Target’s last close. “While margins continue to face pressure from the clearing of excess inventory as well as elevated supply chain costs and product cost inflation, we view these as largely near-term headwinds,” he said in a note to clients. “Looking ahead to next year, we believe TGT’s margins are likely to benefit from lapping the self-inflicted markdown pressure related to excess inventory as well as lapping elevated supply chain and product costs as commodity prices and container costs decline.” One of the biggest challenges Tarlowe noted for the company is inventory, but he said the company is starting to move forward. Inventory growth outpaced sales growth for the past three quarters – a typical story for retailers as supply chain issues that held up stock during the pandemic resolved at the same time that consumer demand began to slide due to inflation and a shift in spending from goods to services. But he noted executives saying the company has been able to reduce ownership in areas that would need markdowns to move inventory, making him confident of an improved outlook going forward. “We believe the majority of inventory-related issues are likely behind TGT and expect relatively lower markdown risk ahead vs other retail peers given the company’s strategic initiatives around inventory,” he said. Similarly, he said the company’s most intense downward earnings revisions are also behind it. There’s upside ahead, he said, as freight costs continue to come down and e-commerce becomes more efficient. The company will also benefit from expanding partnerships with brands such as Ulta and Disney that drive sales growth. The company has an average consumer income of around $60,000, which can help shield it from inflationary challenges as he noted higher earners have not reported feeling hit as hard as lower-income shoppers. In the same note, he assumed Walmart at buy and increased the price target to $165 from $161, which implies 25.7% upside compared to the last close. He said the retailer could stand to gain as consumers trade down to lower-priced items and retailers as inflation continues to pinch pocketbooks. Target’s stock was up 3.2% before the bell. It is trading down about 35.5% so far this year. — CNBC’s Michael Bloom contributed to this report.
