3 Reasons to Avoid TGT and 1 Stock to Buy Instead

Target has had an impressive run over the past six months as its shares have beaten the S&P 500 by 32.1%. The stock now trades at $130.16, marking a 37.9% gain. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy Target, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think Target Will Underperform?

We’re glad investors have benefited from the price increase, but we're sitting this one out for now. Here are three reasons there are better opportunities than TGT and a stock we'd rather own.

1. Shrinking Same-Store Sales Indicate Waning Demand

Same-store sales is an industry measure of whether revenue is growing at existing stores, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).

Target’s demand has been shrinking over the last two years as its same-store sales have averaged 1.4% annual declines.

2. Low Gross Margin Reveals Weak Structural Profitability

At StockStory, we prefer high gross margin businesses because they indicate pricing power or differentiated products, giving the company a chance to generate higher operating profits.

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 28.1% gross margin over the last two years. Said differently, Target had to pay a chunky $71.93 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 has generally stayed the same over the last 12 months, averaging 5.1% 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

We see the value of companies helping consumers, but in the case of Target, we’re out. With its shares topping the market in recent months, the stock trades at 15.9× forward P/E (or $130.16 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better stocks to buy right now. We’d recommend looking at the most dominant software business in the world.

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