Is Target a ‘Sell’? Investors discuss MKM’s initiation note

MKM Partners analyst Bill Kirk initiated coverage of retailer Target Corporation (NYSE: TGT) on Thursday with a “Sell” rating and sees downside potential from $125 to $105. The analyst argues that a string of poor reviews on Yelp!, a notable product overlap with Walmart Inc (NYSE: WMT), an aging store fleet, and disappointing in-store traffic, among many others, are all reasons enough to dump the stock.

Investor: Way off the mark

Loop Capital’s Kourtney Gibson is a Target shareholder and said on CNBC’s “Halftime Report” Kirk’s initiation is not “the right call by any means.” Target remains in an excellent position to monetize on the continued digitization of the economy.

Target stands out in one unique area that Amazon can never compete with, she said. Specifically, consumers who for whatever reason can’t or don’t want to wait for Amazon to deliver a package can easily find it in stores. In fact, Target offers a similar digital experience where a consumer can buy a product online, drive up to a store, and an associate will deliver it to their car. 

“This is a name you are going to hold, and hold, and hold,” Gibson said. “Selling it at $105? If it goes to $105, I’m buying more.”

Najarian: ‘Odd’ Thesis

Part of Kirk’s thesis is “odd,” including calling out Target’s aging store fleet, “Halftime Report” regular Pete Najarian added to the conversation. The reality is Target has spent $7 billion in upgrading its stores.

The analyst also argues that Target’s online strength isn’t enough to offset physical store traffic. This may be hard to understand given Target’s 141% growth in the online business during the most recently reported quarter. Also, the Shipt brand recorded a 280% growth at the same time.

Najarian said he believes Target faces a unique opportunity moving forward and this wasn’t cited by the analyst. Specifically, during the early days of the COVID-19 pandemic, Target sold a lot of low margin goods as consumers looked to stockpile. This could translate to many irregulars or first-time customers coming back to the stores in the future to start buying high margin items.

Investors may also be on Najarian’s side given Target’s stock reacted to the upside. Market participants may have come to realize that compared to Walmart, Target offers better growth and a superior margin upside story.

Unlike Walmart that counts 50% of sales from the grocery category, Target boasts five categories that offer 20% margins. As such, Target’s multiple of 26 times earnings is still “pretty cheap” compared to some of its more pricey peers.