Target cut at KeyBanc on student loan payment headwinds

Target (NYSE:) was cut to Sector Weight from Overweight at KeyBanc on Monday due to increasing consumer headwinds.

Analysts told investors in a note that while the firm still believes in Target’s long-term margin recovery story, headwinds over the next 12 to 18 months, such as student loan payments slated to resume in the third quarter, have led to the downgrade.

“Last week, Congressional leaders voted to raise the debt ceiling, which included a condition that student loan payments resume after August 30. As detailed in our note today, our analysis suggests a sizable headwind from this policy change,” wrote analysts.

“With ~27M borrowers expected to begin repayment and an average monthly payment of $400-$460, we estimate the resumption of federal student loan repayments will create a ~$46.1B headwind from September-December, with an annualized impact of $128.8B-$148.1B.”

Analysts added that the policy change also further elevates the risk for consumer discretionary spending, particularly for the 2023 back-to-school and Holiday Season, and as a result, it presents TGT with additional downside risk.

“Given the recent selloff in shares, we believe NT downside may be limited, but we see the growing risk of student loan payments as likely pushing out the margin recovery story at least another year,” they concluded.