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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 has seen a consistent decrease in the average U.S. revenue per square foot in recent years. It declined from $296 in 2007 to $274 in 2009, due to a decrease in comparable store sales growth. However 2010 onwards, it started increasing and reached $303 in 2012 due to sales rebound.We expect this figure to continue to rise in the future. In case the average revenue per square foot increases to $360 in coming years, there could be 10% upside to our price estimate. On the flip side, if it declines to $300, there could 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. If the store count reaches 2,050 by the end of our forecast period primarily driven by CityTarget's (Target'; smaller format stores) expansion, there could 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 could 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 revenue during 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.
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.
* Beginning Q1 fiscal 2013, Target will not report this segment separately. It will report the profits earned as an offset to SG&A expenses. We will make the changes in our model correspondingly once the results are reported*
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. It plans to open a total of 124 stores across Canada by the end of 2013.
The U.S. segment is most valuable to the company for the following reasons.
Major presence within the US
Target is one of the largest retailers in the U.S. competing with giants like Wal-Mart. In January 2011, Target took its first step in expanding outside the U.S. with the purchase of 220 Zellers stores in Canada. Target will convert about 125 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.
Target expands its profit potential as it enters international markets
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 recently opened its first stores in the region and will increase the store count to 125 by the end of fiscal 2013.
As the U.S. market becomes increasingly saturated with retail giants such as Walmart, companies are beginning to establish a presence overseas in order to seize market share in other countries. Wal-Mart, for example, has over 5,500 stores in Central and South America, Mexico, Canada, Japan, China, and the United Kingdom. Target might also look at other markets to expand at a later stage.
Focus on integrating stores and e-commerce channel
Target is looking to use to power of social media to direct online traffic to its stores. Recently, it launched a new website known as "Cartwheel" in partnership with Facebook. This allows the users to log into Cartwheel using their Facebook accounts and gain access to various discounts. These discounts are in form of barcodes that can be redeemed at any Target store. Also, the retailer added free wifi in its stores for the customers to access its e-commerce website. Last year, Target became a member of Merchant Customer Exchange (MCX) and has been working on developing better mobile payment solutions.
Over the last few years, online retail sales have grown at a much faster rate than store sales. In 2010, for instance, internet sales increased 10% compared to 6% for brick-and-mortar stores according to comScore. Since online sales do not contribute substantially to Target's overall revenues, it makes sense for the retailer to employ every possible strategy to cater to online customers given the expected growth in online retail sales. Recently, Target also announced a price match strategy wherein it will match the prices of top online retailers such as Amazon allowing it to remain competitive.
Expansion of CityTarget stores
As Target's presence in the U.S. is nearing a saturation point, the retailer is turning to urban areas for its expansion. Last year, Target launched its pilot program smaller format CityTarget stores in some densely populated urban markets. According to the company, these stores have generated robust sales even during the weak holiday season. Currently, Target has only 5 such store in the U.S., but it plans to add these throughout the U.S. and Canada over time.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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