BMO downgrades Target, citing persistent inventory challenges ahead

Published Thu, Nov 17 20225:43 AM EST

BMO Capital Markets is losing faith in Target 's growth story given the challenges it faces ahead. Analyst Kelly Bania downgraded the retail stock to market perform in a note to clients Wednesday, saying that sufficiently matching inventory to demand will likely persist as a challenge for Target in the near term. "While we continue to expect TGT's EBIT margin to rebound to 6%+ following depressed levels in 2022, we believe the stock is likely fairly priced and already reflects a rebound margin (we forecast nearly 90% earnings rebound next year), but we are less certain regarding the magnitude of sales to attach to this EBIT margin given TGT's market share gain trends," she wrote. Bania also lowered BMO's price target on the stock to $165 from $190 a share, suggesting a slight 6% advance from Wednesday's close. The downgrade from BMO comes after the company posted disappointing earnings and warned of a soft holiday quarter as sales slow. The stock plummeted 13% on Wednesday. Bania views dwindling market share as one of the biggest risks for Target ahead, estimating that the company is on pace to lose more than $3 billion in market share this year and headed for more potential losses long term. "We are concerned that TGT may have developed a dependency to the strong traffic and may be promoting/managing to a depressed GM% in order to maintain the incredible market share and $30+ billion in sales growth it gained over the past few years leaving us less certain as to the magnitude of sales that we should attach to this more normalized EBIT margin of 6-7%," she wrote. Deutsche Bank also shifted its position on Target shares following Wednesday's earnings results. Analyst Krisztina Katai downgraded the stock to hold from buy, citing dwindling confidence in Target's ability to regain margin in 2023. "The softness in comp performance comes despite elevated promotional activity 4QTD, as consumers are increasingly gravitating towards deep discounts and value, which makes the margin recovery story harder to defend, in our view," she said in a note to clients Thursday. "Ultimately, we can no longer confidently model $12+ in EPS next year." Katai slashed the bank's price target to $144 a share from $183, suggesting a 7% downside from Wednesday's close. Year to date, the stock has lost nearly 33%, sitting nearly 40% off its 52-week high. — CNBC's Michael Bloom contributed reporting