Target needs a reality check: Analyst

Target is feeling pretty good about the future.

The big-box retailer has been on somewhat of a roll lately, logging six straight quarters of comparable-sales gains, and growing earnings by 2.1 percent during the most recent period.

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Such momentum caused the retailer to announce this month a long-term goal of achieving at least a 3 percent annual comparable-sales increase, up from its earlier implied guidance for a 2 percent to 2.5 percent lift.

For one analyst, this optimism may be a bit misguided. Barclays' Matthew McClintock downgraded the bull's-eye retailer from "overweight" to "underweight," saying he is "highly cautious" about companies that are externally optimistic.

In particular, he questioned Target's ability to drive a 3 percent annual comparable-sales gain, given that it hasn't achieved that metric since 2011. Prior to 2011, the company's most recent 3 percent gain came in 2007, when it was benefiting from new store expansion and less aggressive competition.

McClintock was bearish on general merchandise stores as a whole, predicting that the rise of Amazon will cause these stores to continue losing share over the next five years. But he argued that deteriorating trends in this category could hurt Target, in particular.

"We forecast that the general merchandise category as a whole will only grow by an aggregate $25 billion in the next five years," McClintock told investors. "Given Target's merchandise mix that is less food dependent than other general merchandise retailers [such as Wal-Mart or Costco], we believe the company could face the most pressure from this macro shift in consumer shopping channels."

Target shares were trading 2 percent lower, near $82, on Thursday.

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Target's goal to achieve a 3 percent same-store sales gain is not just formidable when stacked against its internal performance. According to data from Retail Metrics, retailers' overall quarterly comparable sales have touched 3 percent growth just once in the last 15 quarters.

The companies that tend to lead the charge are those that are either working off a smaller base, such as Kate Spade or Vince, or those that operate in a red-hot sector, such as Home Depot or Lululemon.

To achieve its goal, McClintock said Target would need to drive stronger growth through its digital channel, where it has already fallen short of its own plans. In 2015, the retailer set forth a goal to log digital sales gains of at least 40 percent. Instead, it reported an increase of just 31 percent in its first year. That's despite the fact that the retailer offered free shipping during the critical holiday period, while key competitors including Wal-Mart did not.

To be sure, Target did blow Wal-Mart out of the water in terms of online sales growth during the fourth quarter. Target's digital revenues increased 34 percent, compared to Wal-Mart's 8 percent growth. However, It's also worth noting that Wal-Mart is working off a larger base.

"We estimate that when Wal-Mart's e-commerce business was at a similar size it was growing at a much faster rate in the 40 percent to 50 percent range," McClintock said.

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For its part, Target has been investing in its website, working to lessen the amount of out-of-stock merchandise on its shelves, and focusing on what it calls its "signature" categories — style, baby, kids and wellness — to continue driving comparable sales higher. It is also in the process of examining opportunities to upgrade and grow its food offering.

Yet many of the woes weighing on retail are out of Target's control. Despite a lift in consumer conference in March and an improving labor market, shoppers refuse to spend freely. Ken Perkins, president of Retail Metrics, said the "fly in the job market ointment continues to be wage gains."

Indeed, several analysts have said that until consumers start experiencing wage growth, retail sales will continue to be held back. Yet from a profit standpoint, pressure — and in some cases, legislation — surrounding minimum pay among retail workers will further strain retailers' bottom lines.

"We believe margin pressure could materialize from several sources, but are increasingly cautious regarding labor costs," McClintock said.