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Target Corp. was hit Wednesday with a double downgrade by Raymond James, which cited signs the discount retailer was suffering from continued weak sales and traffic trends.
“Our change in opinion reflects our belief that [quarter-to-date] sales and traffic trends have remained soft after taking a step down early in the quarter and suggest Target is losing topline momentum,” analyst Bobby Griffin wrote in a note to clients.
Griffin slashed his rating on Target’s
TGT,
stock by two notches, to market perform from strong buy.
The stock fell as much as 0.9% moments after the open before bouncing to be up 0.1% in morning trading. It has dropped 14% over the past three months, while the Consumer Staples Select Sector SPDR exchange-traded fund
XLP,
has slipped 0.5% and the S&P 500
SPX,
has rallied 12.4%.
The downgrade comes three weeks before Target is slated to report results for its fiscal second quarter, which runs through July. The FactSet consensus for revenue has fallen to $25.56 billion from $26.3 billion at the end of April, while the same-store sales consensus swung to negative 2.2% from positive 0.3%.
“[W]e have seen further indications that overall consumer discretionary spending (more important for [Target’s] mix of products) was weak during [the fiscal second quarter] — creating greater potential for a higher promotional environment and consumables mix and ultimately delaying Target’s margin recovery story (key part of our prior thesis),” Griffin wrote.
While Target is a component of the consumer staples ETF, it has relatively large exposure to consumer discretionary trends. In the first quarter, Target’s food and beverage revenue represented 24% of total revenue, while rival Walmart Inc.’s
WMT,
grocery revenue was 61% of total revenue.
Over the past five years, the correlation coefficient between Target’s stock and the consumer staples ETF has been 0.793, while the correlation between the stock and the Consumer Discretionary Select Sector SPDR ETF
XLY,
has been 0.933. A correlation of 1.000 would mean they move exactly in sync.
In addition to discretionary-spending concerns, Griffin said pressure from greater shrink, or loss of inventory resulting from theft and organized crime, remains a “wildcard” in Target’s results. He doesn’t expect any meaningful improvement for at least the rest of 2023.
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