Target (NYSE:TGT) is one of the largest retailers in the U.S., competing against giants such as Wal-Mart (NYSE:WMT). Through its 1,778 stores, it offers a wide range of household essentials, hardlines, apparel & accessories, home furnishing & decor, and food & pet supplies.  Our price estimate for Target stands at around $69, which is roughly in line with the market price. In this analysis, we will weigh the retailer’s growth opportunities against potential risks that support our price estimate.
Target already has good presence in the U.S., and is therefore looking to expand internationally in order to grow its business. In the U.S., its rewards programs are likely to play an important role in driving the store traffic. Given the strong growth in online retail market, the retailer is investing heavily in e-commerce technology. However, Target risks cannibalizing its sales due to its massive size in the U.S. Moreover, slow economic recovery and competition from warehouse clubs such as Costco (NASDAQ:COST) could moderate its growth.
International Expansion Will Open New Growth Opportunities
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 company is about to open its first 24 stores in Canada and will add 100 more by Christmas.  It has been a common practice for many U.S. retailers to expand in to Canada and such expansions have been successful. As the U.S. market becomes increasingly saturated, retailers such as Target are beginning to establish their presence overseas to sustain growth. For example, Wal-Mart 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.
Reward Programs: REDcard & Pharmacy Will Be Valuable In Driving Traffic
Since its launch approximately two years ago, the 5% REDcard loyalty program has been notable in driving Target’s store traffic. The loyalty program allows customers to save money when they shop at Target stores using its brand credit card. ((Target’s REDcard)) 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.  It appears that the value conscious customers are switching to REDcard shopping due to attractive bargains.
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.  In this program, customers get 5% off on shopping after filling five eligible prescriptions.  As the program gains popularity among Target’s customers, we expect an increase in the number of sign-ups, and subsequently higher sales.
Reinforcing E-Commerce Channel To Grow Sales
Online shopping is gaining popularity in the U.S. due to increasing Internet penetration as well as the proliferation of smartphones and tablets. Forrester forecasts that online sales in the U.S. will grow 13% to $262 billion in 2013, and reach $370 billion by 2017.  Moreover, online sales have increased at an average annual rate of 17% since 2004.  
According to Target’s management, its mobile and online sales grew faster than the industry average, which is an encouraging sign. To achieve this, Target has been investing in mobile and website technologies. As part of this initiative, the retailer recently installed free Wi-Fi in its stores, to make it easy for customers to access its e-commerce channel.  As a member of MCX (Merchant Customer Exchange), Target is involved in developing better mobile payment solutions, which should help its online sales.  In 2012, m-commerce (mobile commerce) sales accounted for 3% of total e-commerce sales in the U.S., and this figure is expected to reach 9% by the end of 2017. 
Risks To Consider:
Risk Of Self-Cannibalization Due To Massive Size
Target has a wide presence in the U.S. market, with over 1,770 stores in 50 states and District of Columbia. Due to its huge size, the retailer runs the risk of cannibalizing its own sales. 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 the comparison against recession-hit 2009. Target mentioned cannibalization as one of the important reasons for the slow growth in its comparable store sales. Although the growth increased slightly in the subsequent years, Target will need to be careful regarding its expansion in the U.S.
Sluggish Economic Growth And Competition
About 80% of Target’s revenues come from discretionary items such as apparel, home furnishing and others.  Therefore, the retailer is susceptible to the swings in the economy. The sluggish growth in the U.S. economy might continue to moderate Target’s growth. Although the retailer is looking to grow its groceries business, which is somewhat less affected by economic headwinds, its revenue share still remains low. Currently, groceries account for less than 20% of Target’s revenues.
Due to slow economic growth and persisting unemployment, customers are looking for ways to save money. They are turning to warehouse stores such as Costco 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 comparable store sales growth of 8% in its Q2 fiscal 2013.  On the other hand, Target’s comparable store sales growth stood at just 0.4% in its Q3 fiscal 2012. This period includes the weak holiday season in the U.S. Additionally, while Wal-Mart’s U.S. comparable store sales were up by only 1.8% in fiscal 2013, Sam’s Club’s comparable store sales increased by 3.9%.  This reinforces our earlier view that U.S. buyers are buying less discretionary items and have opted towards warehouse clubs to get better bargains.
Our price estimate for Target stands at $69, which is roughly in line with the market price.Notes:
- Target’s SEC filings [↩] [↩] [↩] [↩]
- Target’s Q4 fiscal 2012 earnings transcript, Feb 27 2013 [↩] [↩] [↩] [↩]
- Wal-Mart’s SEC filings [↩] [↩]
- Pharmacy Rewards [↩]
- U.S. Online Retail Sales To Reach $370B by 2017, Forbes, Mar 14 2013 [↩]
- Calculated using the data available with United States Census Bureau [↩]
- U.S. Online Retail Forecast, 2010 to 2015, Forrester, Feb 28 2011 [↩]
- Merchant Customer Exchange [↩]
- M-Commerce Sales Via Smartphones Hit $8 Billion In 2012, Internet Retailer, Jan 16 2013 [↩]
- Costco’s SEC filings [↩]