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Investment Overview for Target (NYSE:TGT)
Below are key drivers of Target's value that present opportunities for upside or downside to the current Trefis price estimate for Target:
- Target's Average U.S. Revenue per Square Foot: Target's average U.S. revenue per square foot declined from $296 in 2007 to $280 in 2009 primarily due to low store traffic during the recessionary environment. However 2010 onwards, the figure started increasing and reached $303 in 2014 due to better macro-economic environment. We expect this figure to continue to rise in the future driven by the company's rewards program and improving online sales. We currently forecast Target's revenue per square feet to gradually increase and reach $380 by the end of our forecast period. In case the average revenue per square foot increases to $360 instead driven by CityTarget expansion, rapid growth in online sales and good response to the company's rewards program, there can be 10% upside to our price estimate. On the flip side, if the figure only rises to $340 on account of sluggish economic recovery , there can be 10% downside to our price estimate.
- Total Number of Target U.S. Stores: The total number of Target stores increased consistently despite the economic downturn of 2008-2009. Target increased its U.S. retail store count steadily from 1,591 in 2007 to 1,778 at the end of fiscal 2012. We expect the retailer to continue to expand, though at a much slower rate due to its existing large scale presence. We forecast that the retailer's store count will reach around 1,890 by the end of our forecast period. However, if the store count reaches 2,050 by the end of our forecast period primarily driven by CityTarget's (Target'; smaller format stores) aggressive expansion, there can be 10% upside to our price estimate. However, if the store count stagnates to around 1,800 towards the end of the forecast period due to market saturation, there can be 5% downside to our price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for Target at the top of the page.
Target Corporation is among the ten largest retailers in the U.S. by sales. Target generated over $70 billion in revenues in 2012 through the sale of apparel, electronics, housewares, groceries and other products. It had approximately 1,778 U.S. stores under operations as of January, 2013.
The economic downturn of 2008-2009 made it clear that the firm is highly exposed to U.S. macro-economic trends which impact retail spending. Although Target positioned itself as a "cheap chic" retailer, consumers still cut back on goods such as apparel and electronics, both of which play an important role in Target's total sales. As a result the retailer witnessed negative growth in its revenue per square foot during recession. However, as the economy started recovering, Target's witnessed a sales rebound which helped its comparable store sales growth.
After searching for a buyer for two years,Target sold its credit card division to Toronto Dominion Bank last year to pay off a portion of its debt and get a strong financing partner. On March 13 this year, the retailer announced the closing of the seven-year deal under which TD bank will underwrite, fund and own future Target credit card and Target Visa receivables.
* Since Q1 fiscal 2013, Target no longer reports this segment separately. It reports the profits earned as an offset to SG&A expenses.
Fiscal 2013 marks the beginning of Target's international operations, which will start with Canada. In March 2013, the retailer opened about 17 stores in the region and had 68 stores operational at the end of Q2 fiscal 2013. It plans to open a total of 124 stores across Canada by the end of 2013. Although Target had high hopes from Canada, initial results have been disappointing due to poor customer service.
The U.S. segment is most valuable to the company for the following reasons.
Major presence within the U.S.
Target is one of the largest retailers in the U.S. competing with giants like Wal-Mart. It operates close to 1,800 stores in the country, while Wal-Mart has about 4,000 stores. In January 2011, Target took its first step in expanding outside the U.S. with the purchase of 220 Zellers stores in Canada. Target converted about 124 of these stores in 2013.
Competitor U.S. stores are bigger and yield more revenue per unit of retail space
For Wal-Mart, the biggest competitor of Target, an average U.S. store is about 2.5 times as big as the international store in terms of retail square footage. As of 2012, square footage per store for Wal-Mart U.S. stood at 162,300 while that for Wal-Mart International was approximately 59,100.
In 2012, the average revenue per square foot for Wal-Mart U.S. stores was higher at $435 versus $392 for Wal-Mart International stores. Thus, despite being similar in store count, the U.S. segment is more valuable to the company compared to its international segment. In addition, gross margins for the U.S. segment have a relatively more positive outlook, thereby adding to its value. We expect similar patterns for Target stores as well.
Threat of self cannibalization due to massive size
Like any retailer, Target’s long-term sales and income growth depend largely on the company’s ability to open new stores and expand into new markets. However, due to Target’s size, it runs the risk of cannibalizing its own sales in the US. In 2010, Target's comparable store sales increased by 2.1% compared to a decrease of 2.5% and 2.9% in 2009 and 2008 respectively. The company attributes cannibalization as an important reason for the decline of comparable store sales. The company recently unveiled plans to close eight of its stores due to their poor financial performance. We believe that issue of self-cannibalization was behind this move.
Rough start in Canada
In its first expansion outside the U.S., Target bought leases for 220 Zellers stores (one of Canada’s largest mass merchandise retailers) for $1.83 billion. In June 2011, Target doubled its renovation budget for the project and increased it to $2.3 billion to convert Zellers stores and integrate them into its retail network. Target had about 68 stores operational at the end of Q2 fiscal 2013 and it plans to take this count up to 124 by the fiscal year end.
However, the initial results from the region have not been pleasing. According to a survey conducted by Forum Research, only 27% of the customers polled were “very satisfied” with their experience at Target. Others felt that the products were too expensive and that the retailer was not able to meet customer demand since a lot of products were out of stock. Although Target is trying to catch up with its inventory needs, long lead times are not helping. It is quite clear that the company needs to establish a stable and a responsive supply chain in order to generate better sales in the future. However, it won’t be easy as the retail landscape in Canada is highly developed and competitive.
Greater focus on groceries to improve store traffic
Consumer spending on groceries can be classified as non-discretionary and is therefore less correlated to macroeconomic factors. Also, groceries are a big market segment, accounting for annual sales of over $560 billion. At Target, stores with a partial-line of groceries in them have higher overall sales than stores without groceries. Hence, the retailer has been increasing the revenue share of groceries over the last few years with its P-Fresh store remodel. P-Fresh is an expanded fresh food layout within Target’s stores which increases the grocery space by 130% and food categories by 90%. Since its launch in 2009, the retailer has added this format to more than 1,100 of its stores. Also, Target converted about 1,000 of its general merchandise stores to expanded food assortment stores during 2010-2011. The company is even employing some unconventional methods to promote its groceries. At the beginning of 2013, Target came out with an ad campaign that treated grocery items like fashion accessories. Over the last four years, the retailer has increased the revenue share of groceries from 16% to 20%. Although this is a low margin business, it allows the company to drive more store traffic.
Growth of online business
Target’s online sales do not contribute much to its overall revenues, but they have been growing at a robust pace. During the first quarter of fiscal 2013, the retailer’s online revenues increased by 15% while its comparable store sales declined by 0.6%. Given the immaterial contribution and the optimistic outlook of the U.S. online retail industry, it makes sense for Target to focus on its e-commerce channel.
Following the footsteps of Wal-Mart and Amazon, Target is testing same-day delivery for its online orders in collaboration with Google and eBay. It is leveraging the power of social media with its “Cartwheel” app in partnership with Facebook, which allows users to log in and gain access to various offers and discounts. The retailer stated that customers have saved more than $10 million within a couple of months. Additionally, Target is adding new categories to its online product portfolio with various acquisitions such as CHEFS Catalog, Cooking.com, and DermStore Beauty Group. It is also installing free wifi in all its stores to promote the use of its mobile apps. With these efforts, we believe that e-commerce can become a big business for Target in the future. Even the online retail market is expected to increase at a CAGR of 9% for the next five six years.
Expansion of CityTarget stores
To continue its expansion in the U.S. urban markets, Target launched its smaller format stores in July 2012. The CityTarget stores are about 40% smaller than a typical SuperTarget store and offer a range of uniquely tailored merchandise according to the needs of urban dwellers. Since these stores offer products catering to a customer’s daily needs, they generate high sales per square foot. In 2013, these stores performed very well despite the prevailing weakness in the U.S. retail industry. The retailer currently operates only eight such stores, but plans to add them throughout the U.S. in the coming years.
Rewards program to stimulate consumer spending
Target’s REDcard and pharmacy rewards programs have been important in attracting value conscious customers. The 5% reward loyalty program allows customers to save money when they shop at Target stores using its brand credit card. The company has stated that its REDcard customers tend to visit twice as often as its regular customers and spend about 50% more.
Over the past three years, there has been a significant increase in the total REDcard penetration. From 5.9% in 2009, the figure jumped to 13.6% by the end of 2012. With rising popularity of REDcard shopping, we expect greater store traffic at Target which will aid its comparable store sales growth. Additionally, the company’s relatively new loyalty program (pharmacy rewards) might also have some positive impact. Pharmacy guests have shopped at Target stores about three times more often and spent 50% more than the non-pharmacy guests.
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