Target shares could climb 24% as the retailer steers through economic and inventory challenges, Jefferies says

• Target shares rose Tuesday after Jefferies said it sees big upside in the retailer's stock price.
• The company was upgraded to a buy rating, with a price target of $185, or roughly 20% above current levels.

Target shares could bounce 24% from current levels, says Jefferies, which put a buy rating on the retail giant, citing its ability to withstand a tough economic environment marred by inflation.

Shares rose as much as 8% to $161.13 on Tuesday, boosted by the report. Jefferies' newly set price target of $185 marks a 24% upside to Monday's close.

Target's rating was upgraded to buy from hold. Walmart also received a buy rating.

"We think the current macroeconomic backdrop, while admittedly challenged given the interest rate/inflationary environment, is one in which both Walmart and Target can outperform," analyst Corey Tarlowe wrote in assuming coverage of the companies.

Target shares had tumbled about 35% this year through Monday, punished in part as the company has been working on getting rid of excess inventory. The company's second-quarter earnings dropped 89% and had warned profit would be hurt as it planned price cuts to sell piled-up inventory.

"While some element of risk still exists as a result of TGT's inventory positioning and lower grocery mix versus peers, we believe TGT is better positioned than the broader retail set at present," the analyst said, calling the inventory issues "transient."

Retail stocks on the S&P 500 overall have been under pressure as consumers deal with higher borrowing costs and recession worries as the Federal Reserve combats decades-high inflation by hiking interest rates.

While Target is subject to wage and income fluctuations of its customers, the company has a higher-income customer base than that of Walmart, said Tarlowe. Consumers' balance sheets are in the "best shape" since the 1960s, Jefferies' economists have said, and in the backdrop of economic challenges, the economists also foresee continued upside to income and nominal spending.

That should benefit Target's comparable sales as same-store sales tend to follow year-over-year changes in disposable income, Tarlowe said.

Jefferies put a $165 price target on Walmart, implying an upside of 26% from Monday's close. Walmart shares gained 3% at intraday highs on Tuesday. The stock has lost about 7% this year. The S&P 500 has lost 22% year to date.