3 Reasons to Sell TGT and 1 Stock to Buy Instead

Target has been treading water for the past six months, recording a small loss of 0.6% while holding steady at $98.08. The stock also fell short of the S&P 500’s 11.7% gain during that period.

Is there a buying opportunity in Target, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free for active Edge members.

Why Do We Think Target Will Underperform?

We're cautious about Target. Here are three reasons you should be careful with TGT and a stock we'd rather own.

1. Shrinking Same-Store Sales Indicate Waning Demand

Same-store sales show the change in sales for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.

Target’s demand has been shrinking over the last two years as its same-store sales have averaged 1.6% annual declines.

2. Low Gross Margin Reveals Weak Structural Profitability

Gross profit margins are an important measure of a retailer’s pricing power, product differentiation, and negotiating leverage.

Target has bad unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 28% gross margin over the last two years. Said differently, Target had to pay a chunky $72.00 to its suppliers for every $100 in revenue.

3. Weak Operating Margin Could Cause Trouble

Operating margin is a key profitability metric because it accounts for all expenses necessary to run a store, including wages, inventory, rent, advertising, and other administrative costs.

Target’s operating margin might fluctuated slightly over the last 12 months but has remained more or less the same, averaging 5.2% over the last two years. This profitability was paltry for a consumer retail business and caused by its suboptimal cost structureand low gross margin.

Final Judgment

Target doesn’t pass our quality test. With its shares lagging the market recently, the stock trades at 13× forward P/E (or $98.08 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better stocks to buy right now. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.

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