Target Plunges For 10th Day As Boycott Leads To "Traffic Weakness", JPM Downgrade Adds To Groom And Doom
As if Target didn't have enough headaches on its plate with a nationwide boycotting campaign targeting the grooming-friendly retailer sending its sales tumbling after it too was Budlighted, one can also add a JPM downgrade (from Overweight to Neutral) and price target cut (from $182 to $144) into the mix.
In a note from JPM Chris Hoovers, he explains that he is downgrading TGT to Neutral based on the following:
(1) The consumer is broadly weakening while the share of wallet shift away from goods (51% of TGT sales) is ongoing.
(2) Disinflation in grocery (~40% of sales ex beauty and including essentials) continues to accelerate, eating into the ballast of TGT's recent slightly positive to negative LSD SSS trend. TGT comped +HSD in grocery and +LSD in essentials in 1Q, adding 2-3 points to total 1Q SSS vs. the overall flat comp. However, JPM's projection suggests this tailwind could be close to nil by 4Q. Even beauty (estimated at ~10% of sales) is slowing on a 1Y basis per Nielsen .
(3) While still positive on a 3Y basis, TGT has been giving back share on a 1Y view and this share loss could accelerate into back to school and linger into holiday given consumer pressures and what JPM tactfully calls "recent company controversies." This, the bank says, could turn TGT's traffic negative after an impressive run of 12 consecutive positive quarters. This shift is "generally bad for retail stock valuation given attribution is highest at the topline and, particularly for traffic."
(4) JPM notes that TGT over-indexes to the millennial customer and, should student loan payments come back on - which they are about to, as we discussed recently - the company is more exposed than others in JPM's coverage. Buyside client expectations are in the $6-8MM per month consumer outflow range should this happen, which represents a potential 1-2 point comp headwind to retail spending which is material given the baseline comp discussed above.
(5) Google search surges in states representing ~37% of its stores with the biggest uptick in the south central and south Atlantic (guess what people are searching). JPM examined Google Trends data to see which states have seen the greatest increase in relative search frequency for ̆Target Corporation ̇ over the last week (5/24/23 - 5/31/23) vs. the period from (5/25/22 -4/30/23). Using 8 as the mendoza line to measure the potential for a negative reaction, the states where search surged represent ~37% of its store base.
(6) Finally, TGT share gains have been reverting. As seen below, TGT has been giving back share as other retailers opened and the consumer got back into stores and started dressing up for events. Despite 1Y headwinds, the trend has remained positive on a 3Y basis but this could be at increased risk given the above.
Meanwhile, as Wells Fargo also opines this morning, the controversy around Target’s collection of LGBTQ-themed merchandise for Pride Month "adds uncertainty to a stock that already had earnings risk amid a pullback in discretionary spending."
Most importantly Wells analyst Edward Kelly writes that "there is early evidence of some financial impact, with Placer.ai data signaling incremental traffic weakness in the week ended May 28"
“Traffic has been a key bright spot for TGT as it struggled with margin issues, and a slowdown would be negative”, obviously.
As a result, TGT stock is down for a 10th session in its longest losing streak since February 2000, and together with Tranheuser Bush should serve as a great lesson for any other corporations who seek to alienate the bulk of consumers (especially those who don't live on government handouts) just to cater to a very mentally unstable 0.5% of the population.
