Target may be struggling more than many observers realize and could be facing “a sustained period of comp and traffic weakness,” Wells Fargo analysts led by Edward Kelly warned in a Wednesday research note.
Although the analysts said Target “remains a long-term share gainer,” they downgraded its stock based on evidence of Q4 traffic declines, the “unique level of complexity” of its store-based fulfillment and signs that general merchandise demand more broadly has softened. They also cited a “growing lack of visibility on the margin recovery story,” with promotions likely to remain high and supply chain issues to continue.
“[Target’s] outlook has deteriorated meaningfully and we no longer see the name as an attractive investment into an uncertain 2023,” Kelly said, warning that the retailer’s troubles in Q4 could be an indication of its near-term prospects. According to Placer.ai data provided to Wells Fargo, footfall — which had been a redeeming feature last year as Target revised its outlook downward more than once — has recently declined.
“Given this backdrop, its getting harder to believe the company will end the year with clean inventories as expected. It also seems more likely promotional levels could remain elevated given the consumer backdrop,” Kelly wrote. “[The retailer] will probably work again at some point, but we don’t think it makes sense to be involved with so many unknown variables.”
Other analysts are more sanguine about the mass merchant. In a late-December research note, for example, Telsey Advisory Group analysts led by Dana Telsey listed Target among companies “that are attracting customers, gaining market share, building new omni-channel capabilities, introducing trend-right merchandising, implementing new initiatives, and expanding operating margin,” and listed it as a potential recovery story. However, that team’s top picks for 2023 among discounters were Dollar Tree and Walmart.