Target (NYSE:TGT) is one of the largest retailers in the U.S. and competes with other retailers like Wal-Mart (NYSE:WMT) and Costco (NASDAQ:CSCO). In this analysis, we weigh Target’s growth opportunities against the potential risks it faces. While international markets provide ample growth potential for the retailer, it faces the threat of self-cannibalization in the U.S. At the same time, U.S. buyers have held back on spending and many have opted for warehouse clubs due to the persistently weak economic environment. However, despite competition, Target has been able to sustain growth with its innovative ideas and REDcard reward programs.
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Target Moving to International Markets As The U.S. Market Is Saturated
Marking its first step in international expansion, Target bought leases for 220 Zellers stores (one of Canada’s largest mass merchandise retailers) for $1.83 billion in early 2011. In June 2011, Target increased its allocated budget for the project to $2.3 billion to convert Zellers stores and integrate them into its retail network. The retailer has plans to open 125 to 135 Target stores in Canada during 2013. 
As the U.S. market becomes increasingly saturated, retailers such as Target are beginning to establish their presence overseas to continue to drive growth. Wal-Mart, for example, has over 5,500 stores in the Americas, Asia and Europe, and has been quite successful in countries such as Brazil.  Target is also considering opening stores in Mexico and Latin America in the next 3-5 years.
REDcard Reward Program And Innovative Approach Expected To Continue Driving Traffic
Since its launch approximately two years ago, the 5% REDcard loyalty program has been valuable in driving store traffic. This service allows customers to save money when they shop at Target stores with its credit card. Since the sluggish economy in the U.S. has made consumers more price-conscious, they now place a greater value on price benefits during shopping.
Target’s REDcard’s popularity is evident from the fact that there was an increase of about 50% in revenues from households that began using the REDcards in the third quarter of fiscal 2012.  This implies that the customers using REDcards are actually buying more. In the same quarter, approximately 14% of the retailer’s sales came from REDcard purchases.  Moreover, this figure was nearly three times what it was two years ago. This indicates that the value-conscious customers are switching to REDcard shopping.
Target is known for its innovative approach to improve store traffic. Under Target’s “shops” program, the retailer offers limited edition collectibles from different boutiques across the U.S. Target’s mobile app, shopkick, enables its customers to earn reward points when they scan a product’s barcode using their smart phones. The retailer recently partnered with singer “P!nk” to offer deluxe edition of her new album Truth About Love. Target also launched new brands Threshold in home décor and Nate Berkus collection in interior design. 
Threat Of Self-Cannibalization Due To Massive Size
Target has a wide presence in the U.S. market with over 1,700 stores in 50 states and District of Columbia. Due to its huge size, the retailer runs the risk of cannibalizing its own sales in the U.S. In 2010, Target’s comparable store sales increased by just 2.1% compared to a decrease of 2.5% and 2.9% in 2009 and 2008, respectively.  Even though the retailer returned to positive comparable store sales growth in 2010, the figure was low given compared to recession-hit 2009. The retailer attributes cannibalization as one of the important reasons for the slow growth in comparable store sales. Although the figure increased slightly to 3% in fiscal 2011, self-cannibalization still is an issue. 
Shifting Preference To Warehouse Clubs Due To Weak Macroeconomic Conditions
Due to slow economic growth and persisting unemployment, shoppers are looking for ways to save money. This will continue to drive customers to warehouse clubs such as Costco (NASDAQ:COST) and Wal-Mart’s Sam’s Club, which can be a concern for Target.
Costco generates more revenues than Target and was able to achieve significant comparable store sales growth (7%) in Q2 fiscal 2013. On the other hand, Target’s growth was relatively slow (2.9%) in Q3 fiscal 2012. At the same time, Wal-Mart’s U.S. comparable store sales were up by only 1.5% due to its huge size and weak macroeconomic conditions in the country.  However, Sam’s Club’s comparable sales increased by 2.7%. This indicates that U.S. buyers are buying less discretionary items and have opted towards warehouse clubs as they get better bargains.
Our price estimate for Target stands at $60, roughly in-line with the market price.Notes: