Target is making progress despite headline earnings: Analyst

Target (TGT) disclosed a 3.7% decline in year-over-year comparable sales in its first-quarter earnings, sharing mixed results on the top and bottom lines.

UBS U.S. Hardline & Broadline and Food Retail Analyst Michael Lasser sits down with The Morning Brief to discuss the buying opportunities in the retailer's stock while consumers battle inflation and credit card debt.

"This is a wonderful buying opportunity. keep in mind that Target is still on pace to earn somewhere in the neighborhood of $9.50 this year, putting it well-positioned to earn $10 next year. If that's realistic, the stock is trading right now at 14 times that number. That is just too low a multiple," Lasser says. "Another way to think about it is Target's in a good spot to generate at least $4 billion of free cash flow this year, that it can distribute to shareholders in the form of share buybacks and dividends."

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Read more about Target's earnings here

Video Transcript

Target heading for its biggest one day drop that we have seen in nearly two years.

It had been off, it's off its lows of the session right now after the retailer though missing its mark in its first quarter earnings report, the story largely coming from Target's physical stores where traffic in the number of transactions fell during the quarter.

Company executives are blaming inflation saying that higher prices are taking a toll on consumers here with more.

We wanna bring in Michael Laser.

He's an analyst with U BS covering Target, Michael.

It's great to talk to you.

So first, just your take on Target and why we are seeing such a different story of play out from Target compared to what we heard from Walmart just a week ago.

Thanks for having me.

Uh Our take on Target is that while some of the headline numbers were light of what was expected targets clearly making progress.

Its same store sales was down less this quarter than it was last quarter.

Uh Plus it showed progress on its gross margin especially important in light of facing more difficult comparisons on the gross margin.

It also noted that uh shrink, which is the unexplained loss of inventory has turned the corner and it's, it saw a 20 basis point improvement from that product, uh, from that area within the quarter.

I don't think that this is a story of consumers who were going to one mass merchant to another.

Keep in mind that target and Walmart have very different category mixes, target over indexes to more discretionary goods, things like coffee makers, televisions, uh, apparel that all of which are under pressure right now.

So that is probably weighing on target sales.

Walmart leans a bit heavier on consumable items and and it's executing at a very high level and that's what uh probably driving its business.

So I I would not look at this as uh the performance of one retailer is mutually exclusive with the performance of another.

So for investors who are looking at this stock price decline on the day, should they feel comfortable then if they were to add on to or initiate a position in target on the weakness that we're seeing?

Absolutely, this is a wonderful buying opportunity.

Keep in mind that target is still on pace to earn somewhere in the neighborhood of 5 $9.50 this year, putting it well positioned to earn $10 next year.

If that's realistic, the stock is trading right now, 14 times that number that is just too low.

A multiple another way to think about it is targets uh in a good spot to generate at least $4 billion of free cash flow this year that it can distribute to shareholders in the form of share buybacks and dividends.

And if you look at that relative to its market cap, it translates to a 6% free cash flow yield for a business of this standing and this quality that is a a very attractive valuation level.

And we would advocate that investors take advantage of the short term dip in the stock price.

You will make money in our view over the long term Michael.

When you take a look at some of the initiatives that target has laid out earlier this week, we heard the news that they're lowering prices on about 5000, up to 5000 products.

Also recently announcing a target 360.

How much are those two moves coupled with some of the other initiatives that they've done is that going to really move the needle, help them win back, that lost market share.

I think it will.

The to the target shopper right now is under uh a significant amount of pressure from the collective impact of inflation uh from uh rising credit card debt target noted that one in three American consumers have maxed out on their credit cards right now.

All of those suggest that target needs to lean in to value uh which is suing by these price investments.

And at the same time, it's also introducing more private label products that come at a very attractive price.

So uh those factors should drive better trends at target coupled with easier comparisons in the quarters ahead.

And you think and compare target to what we're seeing in, in Walmart right now and how both of these have a, a grocery play to try and lure consumers in and make sure that they are shopping in other aisles of the store.

But is there, is there one play that's really more well positioned at this juncture?

So the near term momentum has to go to Walmart and it's benefiting from traffic to its stores, traffic to its online business.

It has expanded its online assortment to 420 million items online.

So that makes it uh appeal to a broader array of, of customers target right now is thought of as more of a discretionary retailer in areas like home and consumer electronics and sporting goods.

And that's those are areas where the consumer is just not focused right now.

Now, with that being said, there's quite a divergence in the multiples of these two stocks.

We argue that they both can continue to outperform given the relative positioning of those businesses along with their evaluation.

So we don't think it's one or the other.

Uh We think that they both are core holdings for those who are vested in the retail sector, Michael Lasser, U BS us Hardline and Broad line and Food.

Thank you very much.

For having me.

Thanks so much, Michael.

Good to see you.