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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. 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 $365 by the end of our forecast period. In case, the average revenue per square foot increases to $380 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 $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 1,790 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, 2014.
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 last year when it opened its first store in Canada in March 2013. Since then, the retailer has expanded aggressively ending the year with 124 stores. The company had bought leases for 220 Zeller stores in 2011 and had spent $10 million on each one of them to convert them into the iconic Target format. Although the retailer had high hopes from Canada, initial results have been disappointing due to poor customer service. The company generated just $1.3 billion in revenues during 2014 and clocked up $941 million in losses. Now, the retailer plans to slow down its expansion and take the store count up to just 150 over the course of next four-five years.
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.
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. Going forward, the company is looking to slow down its international expansion and continue to open smaller format stores in the U.S.
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 2013, square footage per store for Wal-Mart U.S. stood at 162,300 while that for Wal-Mart International was approximately 59,100.
In 2013, the average revenue per square foot for Wal-Mart U.S. stores was higher at $434 versus $391 for Wal-Mart International stores. Thus, despite having fewer number of stores, the U.S. segment is more valuable to the company compared to its international segment.
We expect similar patterns for Target stores as well. In its first year of international operations, Target's revenue per square foot was low at $93 with average square footage at 114,000 square foot. In comparison, its U.S. segment generated $298 in revenue per square foot with average store size at 134,000 square foot.
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.
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 124 stores operational at the end 2013 and it plans to take this count up to 150 over the course of next four-five years.
However, 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 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 289 in 2013, it has grown its expanded food assortment network from zero to 1,245 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. 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 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. We believe that there is a lot of expansion room for Target’s small stores since Wal-Mart plans to open 270-300 small stores in a single year and some dollar stores operate close to 10,000 stores in the U.S.
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 2013. 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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Who came up with the Trefis forecast for future years?
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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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