Target Stock Catches a Downgrade. BofA Securities Says It’s an Industry Laggard.

Target is lagging behind peers in the retail space, most notably Walmart, BofA Securities analysts argued. (Justin Sullivan/Getty Images)

It hasn’t been an easy few years for Target.

Shares have lagged behind the broader market since the start of 2023, when the retailer’s trajectory suddenly reversed course after finding success during the pandemic. This year alone, shares have slumped 23% versus a nearly 10% gain for the benchmark S&P 500.

BofA Securities analysts added to the growing chorus of pessimists on Wall Street as they cut their rating on the shares to Underperform from Neutral and trimmed their price target to $93 from $105 on Friday.

Shares declined 1.5% to $102.66. The S&P 500 index was down 0.3%.

The downgrade isn’t a call on second-quarter results, which are set to be released on Aug. 20, BofA clarified. Rather, it “reflects our view that TGT’s longer-term outlook is becoming more uncertain,” the firm wrote.

The analysts see Target as a laggard in its industry, underperforming on digital growth and investments relative to rivals such as Walmart and Amazon.com. They anticipate longer-term sales and margin risks given slowing digital sales and a lack of scale in online advertising.

Digital trends appear challenged, with mobile app monthly users declining 14% in July compared with Walmart’s growth of more than 17%. Walmart’s online observed sales trends “also continue to meaningfully outpace TGT’s,” the BofA team noted.

This could have bigger implications for the retailer. In BofA’s perspective, digital traffic growth is key to scaling digital advertising and third-party marketplace fees, “which are increasingly needed to mitigate gross margin pressures and support investments in automation, technology, and AI.”

That’s only one facet of the problem. Target’s import exposure, at roughly 50% of cost of goods sold, implies a need to raise average prices at almost twice the rate of Walmart to mitigate tariffs.

Assuming sales volume and other key metrics stay flat, and without other mitigation strategies in place, Target would require an 8% average price increase to fully offset tariffs in 2027, compared with just 4% to 5% for Walmart, the analysts said.

Recent changes, including Target’s dissolution of its partnership with Ulta Beauty could exacerbate risks, the BofA team added.

The BofA note echoed an argument from Barclays analyst Seth Sigman, who downgraded Target shares to Underweight from Equal Weight at the end of July. As Target’s business remains under pressure, Walmart is better positioned for gains, Sigman wrote at the time.

Many on the Street are still waiting to see how things pan out for the beleaguered retailer. Of 38 firms polled by FactSet, 22 rate Target at Hold. Just 10 rate the stock at Buy or the equivalent, while six rate it at Sell.

Write to Mackenzie Tatananni at mackenzie.tatananni@barrons.com