For Target Stock, Improving Margins Could Be a Key Driver



Recent trend

One thing that’s hurting Target (TGT) stock is the company’s continuously subdued underperformance. Retailers continue to invest in prices to drive traffic amid online players’ and deep discounters’ increased competition, which is hurting their margins.

Higher digital investments and online order fulfillment expenses have further pressured retailers’ margins, especially Target’s and Walmart’s (WMT). As shown in the graph below, Target’s margins have stayed narrow over the past several quarters, limited by lower pricing and higher digital fulfillment costs. Walmart’s and Costco’s (COST) margins have also remained subdued.

Could Target’s margin improve?

Target’s management had forecast its gross margin to stabilize and improve in the fiscal first quarter. However, its gross margin narrowed 20 basis points, reflecting higher digital fulfillment costs.

The company is focusing on supply-chain reinvention to lower its per-unit digital fulfillment costs, and higher wide-margin product sales and productivity and sales at remodeled and small-format stores are expected to support its margins in future quarters.

However, the company’s margin growth may be limited as its digital efforts ramp up, compressing its margins. Higher wages and depreciation and amortization expenses related to its remodeled stores have remained a drag.

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