S&P 500   5,022.21
DOW   37,753.31
QQQ   425.84
ASML Fires Warning Shot For Tech Investors
Checking in with 5 Bitcoin Stocks Ahead of Bitcoin's Halving
Lululemon’s P/E Is Back to 2017 Levels: Should You Buy the Dip?
Closing prices for crude oil, gold and other commodities
Abbott Laboratories Outlook is Healthy: Buy the Dip
Prologis Stock Leading U.S. Logistics Boom
Johnson & Johnson’s Q1 Checkup: Mixed Results, Optimism Remains
S&P 500   5,022.21
DOW   37,753.31
QQQ   425.84
ASML Fires Warning Shot For Tech Investors
Checking in with 5 Bitcoin Stocks Ahead of Bitcoin's Halving
Lululemon’s P/E Is Back to 2017 Levels: Should You Buy the Dip?
Closing prices for crude oil, gold and other commodities
Abbott Laboratories Outlook is Healthy: Buy the Dip
Prologis Stock Leading U.S. Logistics Boom
Johnson & Johnson’s Q1 Checkup: Mixed Results, Optimism Remains
S&P 500   5,022.21
DOW   37,753.31
QQQ   425.84
ASML Fires Warning Shot For Tech Investors
Checking in with 5 Bitcoin Stocks Ahead of Bitcoin's Halving
Lululemon’s P/E Is Back to 2017 Levels: Should You Buy the Dip?
Closing prices for crude oil, gold and other commodities
Abbott Laboratories Outlook is Healthy: Buy the Dip
Prologis Stock Leading U.S. Logistics Boom
Johnson & Johnson’s Q1 Checkup: Mixed Results, Optimism Remains
S&P 500   5,022.21
DOW   37,753.31
QQQ   425.84
ASML Fires Warning Shot For Tech Investors
Checking in with 5 Bitcoin Stocks Ahead of Bitcoin's Halving
Lululemon’s P/E Is Back to 2017 Levels: Should You Buy the Dip?
Closing prices for crude oil, gold and other commodities
Abbott Laboratories Outlook is Healthy: Buy the Dip
Prologis Stock Leading U.S. Logistics Boom
Johnson & Johnson’s Q1 Checkup: Mixed Results, Optimism Remains

Target’s Shrinkage Problem Creates Opportunity for Investors

Target stock price chart

Key Points

  • Target is the poster child for rising shrinkage and its impact on profits. 
  • Membership clubs like  Costco and Walmart's Sam's Club are immune to the issues. 
  • The analysts have set the bar for Target low; efforts to combat shrink could result in bottom-line strength and catalyze the market. 
  • 5 stocks we like better than Target

The National Retail Federation reports that retail theft, often referred to as shrinkage, is up 20% YOY in 2023, costing retailers more than $110 billion in profits. This significant figure hurts names like Target NYSE: TGT the most. Based on details from Target’s previous 3 earnings reports, it almost looks like thieves are targeting the store for a reason. 

The company first reported shrinkage as an issue in the Q4 2022 release, and the details worsened as the 2023 fiscal year wore on. The Q1 results include rising levels of theft leading to decreased profit guidance, a half billion worth, and the guidance was lowered again after Q2 for the same reasons. Since then, the company announced closing 9 key locations because of insurmountable levels of theft, begging the question why. 

“As we look ahead, we now expect shrink will reduce this year's profitability by more than $500M compared with last year. While there are many potential sources of inventory shrink, theft and organized retail crime are increasingly important drivers of the issue,” CEO Brian Cornell said.

At face value, the drivers of increased shrink are rising inflation, high-interest rates, and the increasing cost of basic living. Oddly, companies like Costco NYSE: COST conspicuously report no impact from rising shrinkage again, asking why Target is suffering so badly, and the answer may be simple: Target’s newer store layouts rely heavily on self-checkout, and there is insufficient coverage watching the front door. This makes it an easier target than the membership clubs, which not only regulate (to some degree) who enter, but membership is required to purchase, and they utilize door monitors and check tickets as you leave. 

Costco Has Strong Quarter: CFO Says Shrink Not A Problem

Costco reported a notably strong quarter for FQ3/CQ4, with revenue up 9.5%, earnings up 15%, and both better than expected compared to Target’s weak showing. There are more reasons than theft to drive the disparity, but theft is a significant factor. Where Target continues to report significant impacts, Costco’s CFO has stated several times this year that shrink is not a concern. According to him, Costco’s shrink rose a few basis points ahead of and at the beginning of the pandemic due to it bringing back self-checkout. Still, security measures keep the figure in a tight range, and there has been no significant increase this year. 


Walmart Growing, Raises Guidance 

Walmart NYSE: WMT is doing a better job with its shrinkage than Target, aided partly by its Sam’s Club segment, but all segments are performing well. The company reported top and bottom-line growth, with revenue up 5%,  compared to Target’s 5% decline, and the profitability outlook is much better. 

Target outperformed on the bottom line and produced YOY earnings growth due to inventory normalization, while Walmart is growing earnings organically. More importantly, Walmart raised guidance and can be expected to outperform in CQ4. In contrast, others, including names like Dick’s Sporting Goods NYSE: DKS, which also reported significant issues with theft, are more likely to continue suffering. 

Is There Hope for Target? An Opportunity is Brewing 

Believe it or not, all is not lost for Target. The company’s financials are in fine shape, and it is trying to combat its problems. The company has begun to improve front door security and other efforts, including locking cases for high-theft/high-cost merchandise and digital inventory tracking

The takeaway is that analysts have been lowering the bar for Target results over the past 2 months and may have set it too low. With shares down more than 50% from the high, the stock trading at only 14X earnings and paying more than 4% looks like a good time to make a small purchase. 

A sign of margin strength, specifically positive updates on shrinkage, could catalyze this market. Shares of Target offer a deep value and high yield at current levels, and the analysts only see an upside for the market. The low analyst price target is 5% above the current action, and the consensus is about 40%. 

As it is, the consensus expects a 5% decline in YOY revenue and a 3.5% decline in earnings. It is unlikely Target will reclaim lost share from competitors like Walmart and major grocery chains in a single quarter. Still, this high-yield Dividend King could outperform the analysts' consensus on the bottom line. 

Target Stock price chart

Should you invest $1,000 in Target right now?

Before you consider Target, you'll want to hear this.

MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and Target wasn't on the list.

While Target currently has a "Moderate Buy" rating among analysts, top-rated analysts believe these five stocks are better buys.

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Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Costco Wholesale (COST)
4.5129 of 5 stars
$715.19-0.1%0.57%46.78Moderate Buy$691.28
DICK'S Sporting Goods (DKS)
4.8566 of 5 stars
$196.93-0.9%2.23%16.17Moderate Buy$208.64
Walmart (WMT)
4.2016 of 5 stars
$59.65-0.3%1.39%31.18Moderate Buy$61.54
Target (TGT)
4.941 of 5 stars
$164.47+0.7%2.68%18.42Moderate Buy$181.85
Compare These Stocks  Add These Stocks to My Watchlist 

Thomas Hughes

About Thomas Hughes

  • tmhughes.writeon@gmail.com

Contributing Author

Technical and Fundamental Analysis

Experience

Thomas Hughes has been a contributing writer for MarketBeat since 2019.

Areas of Expertise

Technical analysis, the S&P 500; retail, consumer, consumer staples, dividends, high-yield, small caps, technology, economic data, oil, cryptocurrencies

Education

Associate of Arts in Culinary Technology

Past Experience

Market watcher, trader and investor for numerous websites. Founded Passive Market Intelligence LLC to provide market research insights. 


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