Bank of America downgrades Target to sell, says long term outlook is faltering

Bank of America downgraded Target (TGT) to Underperform from Neutral, lowering its price target to $93 from $105, citing a deteriorating long-term outlook and significant underperformance against peers like Walmart. Analyst Robert Ohmes highlighted Target's challenged digital trends, evidenced by a 4.1% year-over-year decline in mobile app monthly active users, and its higher import exposure (~50% of COGS), which makes it disproportionately vulnerable to tariffs compared to competitors. This downgrade, implying over 10% downside, precedes Target's anticipated Q2 earnings report, where a 20% year-over-year decline is expected, and follows the stock's more than 22% year-to-date decline in 2025.

Analysis

Bank of America has downgraded Target (TGT) to Underperform from Neutral, reducing its price target to $93, which implies more than 10% downside from its prior close. The downgrade is underpinned by a deteriorating long-term outlook, with TGT lagging key competitor Walmart (WMT) on a comparable sales CAGR basis versus 2019. A critical area of weakness is the company's digital performance, evidenced by a 4.1% year-over-year decline in mobile app monthly active users in July, starkly contrasting with WMT's 17.2% growth. This digital lag directly threatens TGT's ability to scale higher-margin revenue streams like digital advertising and marketplace fees, which are necessary to mitigate gross margin pressures. Furthermore, TGT's significant import exposure, at approximately 50% of its cost of goods sold compared to WMT's 33%, makes it disproportionately vulnerable to tariffs. BofA estimates TGT would need to raise prices by about 8% to offset tariffs, nearly double the rate required for WMT, potentially eroding its value proposition. This negative outlook precedes TGT's Q2 earnings report, where analysts already forecast a 20% year-over-year earnings decline, compounding pressure on a stock that has already fallen over 22% year-to-date.

Key Decisions for Investors

• Investors should consider reducing exposure to TGT ahead of its Q2 earnings, given the combination of a significant analyst downgrade, expected earnings decline of 20% YoY, and recent stock underperformance.
• Monitor the upcoming earnings call for management's specific commentary on mobile user trends and strategies to combat gross margin erosion, as these are the core weaknesses identified in the downgrade.
• The stark divergence in digital growth and tariff exposure between Target and Walmart presents a potential pairs trade opportunity, favoring a long position in WMT against a short position in TGT.