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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 $304 in 2012 due to better macro-economic environment. The figure declined slightly to $298 in 2013 due to sluggish consumer spending in the U.S. on account of increased taxes and slow job growth. It again improved to $303 in 2014, as market conditions improved a little and Target reported positive change in comparable sales. Going forward, we expect this figure to rise in the future driven by the company's small store expansion, rewards program and improving online sales. We currently forecast Target's revenue per square foot to gradually increase and reach $348 by the end of our forecast period. In case, the average revenue per square foot increases to $370 instead driven by CityTarget and Target Express expansion, rapid growth in online sales and good response to the company's rewards program, there can be 5% upside to our price estimate. On the flip side, if the figure only rises to $320 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 1,793 at the end of 2013. 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 instead primarily driven by CityTarget and Target Express 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 $75 billion in revenues in 2014 through sale of apparel, electronics, housewares, groceries and other products. It had approximately 1,790 U.S. stores under operations as of January, 2015.
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.
Target initiated its international expansion in 2013 but after two years of struggle in the country, it decided to shut its operations. The company incurred significant losses in the region and could not see the business going profitable til 2021. Hence, the management decided to discontinue its Canadian business and focus on U.S. growth instead.
The U.S. segment is most valuable to the company for the following reasons.
The retailer is only present in 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. and opened its first stores in Canada in 2013. However, after two years of significant losses the company exited from country, making U.S. its only geography. We believe that the company would not try another international venture in the near future.
Competitor U.S. stores are bigger and yield more revenue per unit of retail space
Wal-Mart's stores are slightly bigger in size than average Target stores, and generate a higher revenue per square feet. While an average Wal-Mart store is about 152,000 square feet in size, an average Target store spreads over 134,000 square feet. While Target U.S. generates $300 in revenues per square feet, Wal-Mart U.S. generates over $430.
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 2009, Target’s comparable store sales declined by 2.9%, following 2.5% fall in 2008. At that time, the company operated 1,740 stores in the U.S. and it cited self-cannibalization as an important reason for the decline in comparable store sales in addition to the economic slowdown. If cannibalization was an issue when store count was 1,740, it will be a bigger problem when the count increases. Therefore, we expect the company to slow down the expansion of its typical big-box stores – general merchandise stores and expanded food assortment stores.
Exit from Canada
Target had high hopes from Canada when early in 2011, it announced the plans to buy leases for 220 Zellers stores (a major discount department chain at that time) for C$1.82 billion. Later, the company revealed that it had acquired leases for only 189 Zellers locations, and was in the process of renovating them. In March 2013, Target finally launched its first three test stores, and ended the year with a massive fleet of 124 locations. However, the retailer's debut turned out disastrous, as it invested around $4 billion setting up its Canadian operations, and clocked up over $2.5 billion in losses in less than two years.
After new CEO Brian Cornell joined Target, he began reviewing the company’s loss making Canadian business, in order to come up with some relevant strategies. Failing to come up with a viable solution for the company's botched up Canadian expansion, he stated that “we were unable to find a realistic scenario that would get Target Canada to profitability until at least 2021″. Another six years of losses would have meant that the company would be burning a significant portion the cash generated from its U.S. business, which itself is struggling. Hence, rather than spending on Canada, it makes sense for the management to focus solely on the U.S. business.
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 has been converting its general merchandise stores to expanded food assortment stores. While the retailer has reduced its general merchandise store count from 1,443 in 2008 to 240 in 2014, it has grown its expanded food assortment network from zero to 1,292 during the same period. This has been accomplished in a program to convert the form into the latter, utilizing the existing network of stores. 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. Digital revenues improved 36% during the fourth quarter of fiscal 2014, but only 90 basis points to overall comparable sales growth. 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. 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.
Expansion of small 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.
Encouraged by the success of Wal-Mart express, Target is developing a separate small format known as Target Express, which is about 15% the size of a general merchandise store. Target is planning to offer private label daily need products such as food, healthcare, beauty and other household essentials in these stores. So far, the lone Target Express store has performed very well, which should encourage the company to open more such stores.
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 20.9% by the end of 2014. 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.
Plans to go aggressive on known-for categories
Brian Cornell, the new CEO of Target, is looking to bolster certain product categories that are likely to draw customer attention. He said that the company will invest more on baby products, including diapers, clothes and gear, along with children’s products including toys and clothes. Categories such as fashion, furniture, organic food and natural cleaning products will also get extra attention. Also, Target is making certain changes to its store layout to promote apparel, baby and beauty products. In July alone, Target converted 167 stores to an enhanced layout for baby products, bringing the total to 200. At present, 50 of the retailer’s stores have enhanced the presentation of apparel, and it plans to take this count up to 600 over the next couple of months. Target refreshed the display of its beauty products earlier this year as well, and has seen an encouraging response. Going forward, the retailer will look to add its rejuvenated formats to more stores.
Target made a name for itself in the U.S. market by selling affordable stylish merchandise. However, with its aggressive push towards groceries, the retailer’s focus on its core categories diminished. With these efforts, Mr. Cornell believes that Target’s brand image will gradually recover.
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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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