Target shares could come under pressure as discretionary spending is cut back amid high inflation. Target’s stock rating was downgraded Wednesday by Bank of America from neutral to buy. It also decreased its price target on Target to $165, from $235. This new price target is only 5.8% higher than Tuesday’s close price. Robert Ohmes from Bank of America stated that “we believe valuation pressure from discretionary category risks will likely compensate for strong long term positioning.” Target warned investors Tuesday that its profit margins will suffer short term as it aggressively reduces inventory and cancels orders. Target has lowered its expectations of operating margin rates for the second quarter from 5.3% to 2%. Three weeks ago, the big-box retailer reported lower-than-expected quarterly results. The company stated that supply chain problems, higher fuel prices and weaker discretionary merchandise sales had all contributed to weaker than expected performance. Target shares have been in decline recently with a drop of 30.7% and 32.6% respectively over the last month. Target is more exposed to discretionary items than its big-box counterparts. Bank of America reported that Target’s sales of general merchandise accounted for more than half of its U.S. revenue in 2021. Walmart, however, accounted for only 32% of Target’s U.S. revenues. Target is currently trading at a lower valuation than other similar discretionary companies. Ohmes stated that competitors may be selling merchandise and could reduce TGT’s value due to the low valuations of leading discretionary retailers. Ohmes warned that discretionary sales could be further affected if there is a downturn in the economy by 2023. —CNBC’s Michael Bloom and Melissa Repko contributed reporting.
