Target Gets a Downgrade. Other Retailers Are Looking Riskier

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BofA Securities downgraded Target to Neutral from Buy. Joe Raedle/Getty Images

Target is edging higher early Wednesday, a day after a revised forecast sent the stock lower.

Yet at least one analyst doesn’t share the market’s optimism, while another argues that its retail peers may also look riskier now: Given Target’s size, when it sneezes, much of retail may catch a cold.

Target (TGT) rose 1% on Wednesday to $157.55. It’s still down almost 30% year to date.

BofA Securities analyst Robert Ohmes downgraded Target to Neutral from Buy, and slashed his price target to $165 from $235, or about 5% above where the stock trades now. The move comes as he thinks the market will grant target a lower multiple now, as “valuation pressure from discretionary category risks will likely offset strong long-term positioning.”

Or in other words, while Target may still look like a good long-term bet, investor distaste for it and fears about the outlook for consumer spending will likely continue to weigh on the shares near-term.

Indeed, Citigroup analyst Paul Lejuez makes much the same point, writing that Target’s latest struggles are “a bad development for the retail industry generally, particularly those that play in categories where TGT is most over-inventoried, which are seemingly home and apparel.”

He argues that regardless of whether or not we actually have a recession in the next couple of years, “it’s going to feel like a recession in apparel.” That’s because excess inventory means that companies will have to discount to move merchandise, rather than raise prices to cover higher input and transport costs they’re facing on the supply side. That will crunch margins.

Lejuez writes that because of Target’s size and issues with apparel, he thinks the news is “most bad” for Gap’s (GPS) Old Navy division (which has already been struggling), Children’s Place (PLCE), Carter’s (CRI), Hanesbrands (HBI), Levi’s (LEVI), Kohl’s (KSS), and Macy’s (M).

Barron’s noted on Tuesday that some of the best-positioned retailers post-Target were those that were least likely to get caught up in the cycle of forced discounting on apparel.  

Write to Teresa Rivas at teresa.rivas@barrons.com