Blowout Results May Not Sustain Target's Rally Target (NYSE: TGT) has had a fantastic 2020/2021 months and for good reason. The company's strategy had it aligned to meet consumer needs so when the pandemic struck Target was ready for business.

We Want To Buy More Target But At Lower Price

Target (NYSE: TGT) has had a fantastic 2020/2021 months and for good reason. The company's strategy had it aligned to meet consumer needs so when the pandemic struck Target was ready for business. Since then the company has produced a sustained uptick in business that we don't see flagging. What we do see is a period of tough comps and a time of increasing headwinds. The next quarter not only brings the first comps against the 2020 COVID-induced surge in sales but faces rising inflationary pressure in the form of labor, freight, and inventory not to mention a shortfall of workers, diminishing effects of economic stimulus checks, and the impact of inflation on the consumer. While Target remains a top name on our list of must-have stocks it's one we think can be bought at a cheaper price.

Target Reaches A Peak In Q1

Target reached a peak in Q1 that we think will cap share prices in the near term at least. The company hasn't stopped growing but growth has stopped accelerating and already begun to slow. While great for Target's long-term value and dividend-paying value, it could result in a pullback or full-blown correction in the not-too-distant future. So, while Target's $24.2 billion in revenue is great now, the comps are about to start getting tougher and headwinds are emerging in the consumer sector.

But, back to the present, Target's Q1 revenue is up 23.3% from last year and beat the consensus by more than 1000 basis points. The gains were driven by a 22.9% increase in comp sales that can be attributed in large part to stimulus checks this past winter. Comps beat the consensus target by more than 1000 basis points as well with strength in both in-store and eCommerce channels. In-store sales increased by 18% while digital sales increased by 50% across all channels to account for 18% of total revenue. Within that, same-day services increased by 90% and drive-up/curbside increased by 123%.

The company was able to leverage the gains and widen margins at the same time but this too has peaked. The gross margin increased by 490 basis points to 30%, 140 bps better than consensus, to drive a 330 basis point beat at the operating level. The gains in margin and revenue resulted in high-triple-digit increases in earnings that also beat the consensus. On a GAAP basis, the company reported $4.14 in EPS or $2.17 better than expected and adjusted EPS of $3.69 or $1.47 better than expected.

The details that make us hesitate with this stock and think its shares have reached a peak is the guidance. The guidance is good in that execs are forecasting mid-to-high single-digit growth in the 2nd quarter and mid-singe-digit growth in the second half but it's bad that growth is slowing and margins will contract. The company is expecting to see the full-year operating margin below 8.0% or nearly 200 basis points less than in the 1st quarter. This may be nit-picking but we see rising inflation as a headwind to both revenue and earnings growth and one that may be underestimated by Target.

The Technical Outlook: Target Surges To New High

Shares of Target surged more than 5.0% in the wake of the earnings report to set a new high. The high is more than 140% above the March 2020 low and well above the 150-day moving average. The indicators are bullish but both the MACD and stochastic come with red flags. The stochastic is overbought and MACD divergent from the new high which reveals some underlying weakness if not a high potential for a correction. If prices do correct we expect to see them retest support at the $200 level and possibly as low as $180 or $190 before hitting bottom. Until then, investors can count on the dividend but they may not want to. At only 1.32% there are better places to put new money to work right now.

Featured Article: Special Purpose Acquisition Company (SPAC) - What You Need to Know