Target’s (TGT) sales may face a hit as student loan repayments restart in early September as part of the debt ceiling deal, JPMorgan warned Thursday afternoon.
“Target over-indexes to the millennial customer and, should student loan payments come back on, the company is more exposed than others in our coverage,” analyst Chris Horvers wrote in a note obtained by Yahoo Finance. “Buy-side client expectations are in the $6-8 million per month consumer outflow range should this happen, per our conversations, which represents a potential 1-2 point [comparable] headwind to retail spending.”
Horvers slashed his rating to Neutral from Overweight. His new price target is $133, down from $182.
Target stock was relatively unchanged at $130 on Thursday afternoon.
The new debt ceiling agreement between the White House and Republicans prohibits President Joe Biden from extending the student loan forbearance. Payments will restart on Sept. 1.
This comes as the Supreme Court is slated to rule this month on the legality of Biden’s plan to cancel up to $20,000 in student loans per borrower.
The payment restart could have a negative impact on the economy and, by extension, discretionary goods retailers such as Target.
“The impact on spending is likely to be modest in the medium-term,” Goldman Sachs chief economist Jan Hatzius in new research today. “We estimate student loan repayments will subtract 0.2 percentage points from personal consumption expenditures growth this year if the student loan forgiveness plan is struck down or 0.1 percentage point if the plan stands.”
For the sector more broadly, that means more challenges ahead for some already troubled retailers.
“The issue of debt is absolutely something that the retail industry — particularly some of the most distressed retailers — are absolutely grappling with, and that’s a challenge,” Forrester Research retail analyst Sucharita Kodali told Yahoo Finance Live (video above). “You have two things working against you: You have the fact that demand may be softening at a time where you also have your payments to make and it is not as easy to borrow.”
Kodali added that this would “most likely” lead to more retail bankruptcies in the next 12 to 24 months.
For Target, the student loan news arrives at a terrible time.
The company’s decision last week to remove some LGBTQ-themed merchandise after customer backlash has triggered even more global backlash.
Shares are down by about 14% in the past week and a half as investors worry about potential second quarter sales and profit hits from the high-profile unrest.
Meanwhile, Target is coming off another quarter of challenged sales as inflation-battered shoppers curtailed discretionary purchases such as apparel and home goods. Historically, these are bread-and-butter sellers for Target — and key profit margin enhancers.
Alleged organized crime at Target stores is also weighing on results, execs have said.
Horvers thinks cautious consumer spending warrants a more cautious take on Target’s stock, aside from the student loan repayment issue.
“We continue to believe that the consumer is broadly weakening while the share of wallet shifts away from goods (51% of Target sales) is ongoing,” Horvers added.
Brian Sozzi is Yahoo Finance’s Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on the banking crisis? Email [email protected]
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Source: https://finance.yahoo.com/news/target-could-face-hit-from-student-loan-payment-restart-analyst-warns-200528017.html