Target Stock: Rally Over, Time to Cool Off?

• A lack of catalysts indicate limited upside in Target stock.
• The positives are priced in to Target stock.

Target (TGT) investors have a lot to celebrate in 2019. Stellar growth in the stock, a robust financial performance, and share buybacks have boosted shareholders’ returns. However, the rally in the stock could end, as a lack of catalysts, tough YoY (year-over-year) comparisons, and a shorter holiday period could limit any further upside.

The company’s robust comps growth drove its stock’s phenomenal growth. Its digital transformation, including its expansion of same-day delivery through Shipt, supported its comps growth and, in turn, its stock. Strong sales, margin expansion, and share repurchases drove its bottom line at a robust pace. It’s grown in the high teens for the last six straight quarters.

We believe Target’s expansion of delivery options and focus on merchandising will continue to support its comps and, in turn, its stock. However, the strong growth in its stock indicates that most of the positives have been reflected in its price.

So far, Target stock is up 65.0% YTD (year-to-date) and has outperformed the broader markets and its peers by a wide margin. In comparison, shares of Walmart (WMT) and Costco (COST) are up 27.8% and 45.6%, respectively, YTD as of October 25.

Lululemon stock is trading about 5% lower than its 52-week high of $114.83. Meanwhile, it’s trading about 81% above its 52-week low of $60.15.

As discussed above, TGT gained from solid momentum in comps, digital expansion, and improved margins. However, it’s up against tough YoY (year-over-year) comparisons in the coming quarters, which could stall the pace of its growth.

Target’s comps growth rate decelerated sequentially in the first two quarters of fiscal 2019. Management expects its comps to increase 3.4% in the back half of the fiscal year. Notably, the company’s comps increased by more than 5% in the second half of fiscal 2018.

We believe a 3.4% increase in comps is still a good growth number given a tough basis for comparison. However, it could fail to boost TGT. Wall Street’s consensus estimate indicates that Target’s EPS growth rate could also moderate sequentially in the coming quarters.

Most analysts maintain “buy” ratings on Target stock. However, their consensus target price indicates little potential upside. Analysts have a target price of $112.32 on Target stock, which implies an upside of about 3% based on its closing price of $109.02 on October 25.

Similar to Target, analysts expect growth to moderate for both Walmart and Costco. Moreover, analysts’ consensus target prices for both Walmart and Costco are roughly on par with their closing prices on October 25.