Target Corporation (NYSE:TGT), a retailing legend, has increased by more than 10% so far in 2023, despite a difficult consumer and a string of disappointing quarterly reports. The business’s fourth quarter report will shortly be available. Is there still room for gain or should I leave before the release of the quarterly results? At the current trading levels on Target, prudence appears to be the wisest course of action for three reasons.

Target stock is not a Buy ahead of the approaching fourth quarter results for three main reasons:

The Struggling Consumer

Since salary increases have not been sufficient to offset rising prices, even in a strong labor market, the average consumer has been losing purchasing power against inflation for 21 straight months. The CPI report demonstrated that, despite the Federal Reserve’s vigorous monetary tightening measures over the past few quarters, inflation is still far from being under control.

According to a recent Goldman Sachs analysis, 35% of the additional money amassed during the pandemic had been spent by mid-January. Goldman anticipates that 65% of those savings will have been used by the end of the year. To put this in context, by the end of 2021 Americans had amassed $2.7 trillion in additional savings thanks to a combination of government epidemic stimulus and reduced consumption. Those savings are now being used up very quickly.

Additionally, according to a recent LendingClub survey of 4,000 people, 166 million Americans (or 64% of all consumers) would be living paycheck to paycheck by the end of 2022. This was an increase from 61% at the same time in 2021. 86% of the 9.3 million more people the poll estimates made more than $100,000 each year. This demonstrates that consumers with lower and moderate incomes are no longer the only ones affected by inflation.

Consumer credit increased by slightly over $11.5 billion in December, which was half of what was predicted, according to a report released last week. Even though credit card interest rates are close to historical highs, credit card debt did increase by 14.8% to $1.2 trillion. Credit cards appear to be being used by consumers to fund purchases more frequently.

Early in 2023, layoffs are also accelerating considerably, which is not encouraging for consumer confidence. Since September 2020, the number of job layoffs announced in January increased from 43,651 to 102,943, a monthly high. This will likely be a key subject for at least the first half of 2023, in my opinion.

All of this will be detrimental to the retail industry, which is why I have a very low weight in it.

Analysts & Insiders

Target Corporation insiders are not buying the dip, despite the stock being down more than $80 a share from its highs in the spring. The most recent insider trading in the shares took place in mid-December when a company officer sold shares in the high $140s for slightly under $3.6 million.

As the fourth quarter earnings report is about to be released, analyst companies are far from optimistic about Target’s prospects. The company has received three new Hold/Equal Weight ratings in the last ten days from Wells Fargo ($165 price target), Gordon Haskett ($155 price target), and Morgan Stanley ($155 price target), however, two of these had their price targets raised. Jefferies kept its Buy rating and $183 price target, while Barclays started out with a new Hold rating and $163 price target on the shares. The only recent true Bull on the stock appears to be Piper Sandler. It recently reiterated its Buy rating while increasing its price objective from $200 per share to a Street high of $220.

Valuation

According to the most recent estimate of analyst firms, Target will earn $5.54 per share in FY2022, with revenues rising by slightly over two percent to $108.5 billion. On comparable sales increase to $9.39 per share in FY2023, profits are anticipated to return strongly. However, that is less than the $11.86 median estimate made three months prior and is still substantially less than the $13.56 per share the corporation made in FY2021.

Target stock is now trading at just over 30 times the expected earnings for the current fiscal year and 18 times the expected profits for the following year. Even with the share’s dividend yield of 2.5 percent, this is hardly in the “cheap” category. Additionally, the business has now missed quarterly forecasts by a wide margin three times in a row. By 64 cents per share in the third quarter, 33 cents per share in the second quarter, and 87 cents per share in the first quarter, the company fell short of the median analyst firm predictions.

Shares of Target Corporation could easily fall below the $160 mark with a fourth consecutive shortfall or just-in-line quarterly earnings. In order to significantly reduce the damage should I be incorrect and Target deviates from its current trend and surprise on the upside, I have deployed some bear put spreads that will pay me 150% if such a scenario materializes. Given the current state of economic instability and consumer pressure, I simply don’t see much value in these Target Corporation prices.

Featured Image: Unsplash @ Max Bender

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