The next economic downturn will test the resilience of American retailers, analysts say, and Target could be among those best-positioned to weather the challenge.
In a note to investors on Thursday, Cowen analyst Oliver Chen named the Minneapolis-based chain the firm’s top pick among retail industry stocks, ahead of competitors Walmart (number two) and Costco (number six).
“We view Target as a best-in-class merchant and believe its private label brands across apparel and home are differentiating it from peers and helping drive strong [comparable sales growth],” he wrote, adding that Target has the cash needed to invest in digital innovation and ultimately survive macroeconomic pressures such as U.S.-China tariffs or a potential recession. Chen also raised Cowen’s price target on the retailer’s stock to $130 from $120; it opened Thursday at $106.90.
In August, the company reported adjusted earnings of $1.82 per share for the second quarter — beating Wall Street’s estimate of $1.62 a share and jumping 23.9% from the same period in 2018. Revenue increased 3.6% to $18.4 billion, and digital sales soared 34% as customers flocked to Target’s same-day fulfillment options: in-store pick up, drive-up and Shipt delivery.
Sales through these channels more than doubled year-over-year, said CEO Brian Cornell, assuring investors that the resources the company has devoted to building this infrastructure are now paying off. (Target acquired the same-delivery service Shipt in 2017 for $550 million in cash, and it has invested significantly in expanding ship-from-store capabilities to leverage its fleet of 1,855 U.S. stores.) Additionally, the company has opened new stores at a time when many competitors are shrinking their footprints, focusing on small-format stores and campus locations, both of which are top performers in the current environment.
Target’s gains — and money it has spent to achieve them – underscore the gap between the top tier of retail performers and their struggling, cash-strapped peers. Bankrupt Sears and debt-burdened J.C. Penney, for instance, could be stuck facing all the same macroeconomic headwinds as Target and Walmart, but with few of the same buttresses, analysts say.
“Retailers with better scale, a fixation on value or elite specialization are in a better place versus others who will lose share,” wrote Chen. “Our take is we are in the midst of an accelerating bifurcation in retail, with winners and better-capitalized companies increasingly taking share across the board.”