Revenue per square foot (RPSF) is the measure of a retailer’s store productivity, and growth in this metric is a good indicator of comparable store sales growth. During the economic downturn, Target‘s (NYSE:TGT) RPSF declined as a substantial portion of its revenues comes from discretionary products.  However, the figure improved in the subsequent years and touched $300 in 2012 as a result of a sales rebound and the introduction of the rewards program.
The growth was accompanied by Target’s strengthening presence in the U.S. as its retail market share steadily increased from 10.5% in 2008 to 11.4% in 2012.  We expect the retailer’s RPSF to reach $390 in the next five-six years, growing at a compounded annual growth rate of 3.5%. This growth will be driven by the mixed impact of improving economy, focus on groceries, expansion of smaller format stores and self-cannibalization.
The U.S. economic growth has been weak following the recession; nevertheless, the economic recovery, the gradual improvement in consumer confidence and lower unemployment should help Target’s comparable store sales. The IMF expects GDP growth of around 3% in the coming years.
Historically, Target’s RPSF has grown slower than the GDP growth rate, and we currently forecasts Target’s revenue per square feet will increase by 2.5%-3% annually due to the improving economy. However, the retailer’s own efforts will help in a big way for driving future growth, and the initiatives below will help.
What Is Target Doing To Improve Its RPSF?
Focus On Groceries For Increasing Store Traffic
Customers visit Target stores that carry groceries more often than other Target stores. Moreover, groceries are part of non-discretionary spending and are less correlated to the state of the economy as compared to other merchandise categories. This is partly why Wal-Mart (NYSE:WMT) and Costco (NASDAQ:COST) have been more resistant against economic headwinds and generate significantly higher revenue per square feet. Groceries account more than 50% of revenues for these two retailers. 
The revenue share of groceries for Target has increased over the last few years, thanks to 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 about 1,100 of its stores. Also, Target converted about 1,000 of its general merchandise stores to expanded food assortment stores during 2010-2011.  This format has been successful for the retailer as it boosted the same store sales during that year. Although grocery items have lower gross margins compared to other products, their ability to attract more store traffic will help Target’s growth.
Rewards Program For Stimulating Spending
Target’s 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. REDcard penetration increased by about 3% in fiscal 2012, and has nearly tripled in the last two years. 
We expect the trend to continue going forward, which should positively impact the retailer’s same store sales. Additionally, Target’s relatively new loyalty program (pharmacy rewards) has also been successful. Pharmacy guests have shopped at Target stores about three times more often and spent 50% more than the non-pharmacy guests.  As this gains popularity with Target’s customers, we expect an increase in the number of sign-ups and subsequently higher sales.
City Target Stores To Tap Urban Markets
Target launched its smaller format stores for urban expansion 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. In the last two quarters, CityTarget stores have generated robust sales despite the impact of a weak holiday season, prolonged cold and the payroll tax increase.   The retailer currently operates only six such stores but plans to add them throughout the U.S. in the coming years. This should lift Target’s RPSF going forward.
Developing Online Channel
Target has been making several efforts to boost its online channel. In Q1 fiscal 2013, despite the impact of cold weather and the payroll tax increase, online traffic and sales grew at a healthy pace. Target’s e-commerce revenues increased by 15% and surprisingly, sales sales were up 20% in weather-sensitive categories. 
Similar to Amazon (NASDAQ:AMZN) and Wal-Mart, Target has also started testing its same day delivery in collaboration with Google (NASDAQ:GOOG) and eBay (NASDAQ:EBAY). Recently, the company launched a new website called “Cartwheel” in partnership with Facebook, which allows users to log in and gain access to various discounts that can be redeemed at stores. Target also acquired ChEFS Catalog and Cooking.com to grow its presence in cooking and kitchenware market. It will also be launching a program that will allow customers to place orders online and pick them up at stores, a service that has been successful for Wal-Mart. The growing online business will directly complement Target’s RPSF growth. However, it could also result in self-cannibalization as most of its products offered in-store and online are similar.
Significance For Target
We currently forecast Target’s revenue per square feet to reach $390 by the end of Trefis forecast period. However, if the careful expansion in the U.S. market mitigates self-cannibalization and pushes RPSF to $420 (CAGR 4%), there can be 5% upside to our price estimate. We believe this is possible as Wal-Mart, Target’s closest competitor, generates RPSF in the range of $430-$440.  On the other hand, if slower-than-expected economic growth limits the figure to $375, there could be 5% downside to our price estimate.
Our price estimate for Target stands at $85, implying a premium of near 20% to the market price.Notes:
- Target’s SEC filings [↩] [↩]
- Estimated using the general merchandise sales data available with census.gov [↩]
- Wal-Mart and Costco’s SEC Filings [↩]
- Target’s Q4 fiscal 2012 earnings transcript, Feb 27 2013 [↩] [↩] [↩]
- Target launches smaller CityTarget stores to appeal to urban shoppers, Huffingtonpost, July 18 2012 [↩]
- Target’s Q1 fiscal 2013 earnings transcript, May 22 2013 [↩] [↩]
- Wal-Mart’s SEC filings [↩]