Target (NYSE:TGT) is one of the largest retailers in the U.S. with more than 1,700 stores in the region. Its huge presence in the country somewhat limits Target’s growth opportunities, and weakness in the U.S. retail industry has also troubled it. Target’s results were disappointing in the last two quarters due to the weak holiday season, prolonged cold weather and weak consumer spending.
To sustain its growth, the company is focusing on its e-commerce channel which has performed relatively well. Target also recently initiated its international operations and is expanding in urban areas (where its presence is limited) in the U.S. with its smaller format CityTarget stores. For its comparable store sales growth, it is relying on its strong product offerings and rewards program to attract more customers.
Why Target Is Boosting Its E-commerce Channel
Online retail sales in the U.S. have grown at a robust pace due to growing Internet usage and the proliferation of smartphones and tablets. Forrester forecasts online sales in the U.S. to grow by 13% in 2013 and at 9% compound annual growth rate thereafter until 2017. This will take e-commerce sales to $370 billion by 2017, up from $231 billion in 2012.  To be a part of this growth, Target is looking to revamp its digital channel which has yielded good results so far. 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 sales increased by 15%, and surprisingly sales grew by 20% in weather-sensitive categories.  The mobile channel, which accounts for 30% of Target’s direct-to-consumer revenues, registered triple digit-growth in both sales and traffic.  This is good news for the company given that mobile is expected to account for 8% of online sales by 2016, up from 3% in 2012. 
Following the footsteps of Amazon (NASDAQ:AMZN) and Wal-Mart (NYSE:WMT), Target also started testing 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 stated that thousands of guests signed up on the website during the first week and already 10% of them have redeemed some offers.  These numbers aren’t significant yet, but could rise substantially going forward given the general consumer shift to the Internet.
In March, the company also announced an agreement to acquire two e-commerce businesses, ChEFS Catalog and Cooking.com, to grow its presence in cooking and kitchenware market.  The retailer plans to combine these two to create a wholly owned subsidiary of Target. Additionally, it is looking to launch a program that will allow customers to place orders online and pick them up at stores.  Wal-Mart already provides such service for its customers and it has been successful so far. If these efforts payoff, it can be a revelation for Target’s direct-to-consumer channel as well as comparable store sales growth.
International Expansion Starts With Canada
Until the end of 2012, Target’s operations were confined to the U.S. During the first quarter of fiscal 2013, Target opened 24 stores in Canada which garnered significant customer attention.  These stores generated about $86 million in revenues driven by a strong performance from home and apparel products.  Target is also focusing on food and health & beauty as these categories are likely to play a vital role in increasing the frequency of customer visits. Interestingly, the initial REDcard penetration in the region (2%) came in ahead of Target’s expectations.  Since the end of Q1, the retailer has opened 24 more stores in the region and is on track with its plans to end 2013 with 124 stores.
We believe that over the course of the next few years, the expansion in Canada will help Target reduce its dependence on the sluggish U.S. economy. Given the similarity between the U.S. and Canadian consumers, expanding in the region will be relatively easy for the retailer. It can also look at other lucrative markets such as Latin America and Asia for its future expansion.
Target Is Leveraging Its Strong Product Offerings To Attract Customers
Target is known for being innovative with its merchandise as it offers exclusive and limited edition products in partnership with various designers and other popular personalities. Following its successful partnerships with Prabal Gurung and Kate Young, Target recently announced collaboration with designer Lauren Bush Lauren and launch of Feed USA + Target collection.  Later this summer, the company will roll out a lifestyle collection of stylish products in sporting goods, stationary, home, apparel and accessories. Recently, Target partnered with Warner Bros. and DC Entertainment to provide Justice League products across various merchandise categories.  It launched a beauty box test last quarter to check the customer response to sample beauty products. The results were encouraging as the inventory cleared within a week. This also generated healthy media coverage and the company received promising feedback on social media platforms.
Target is utilizing a similar strategy for its Canadian stores as well. During the last quarter, it partnered with Roots Outfitters, an iconic Canadian brand that offers well crafted and styled line of apparel for men, women and kids. Inspired by the positive customer response, the company will launch an exclusive collection of cabin chic apparel and home products in collaboration with a Roots Canada designer, Beaver Canoe.  We believe that as the retailer continues these partnerships and enter new ones, it can encourage customers to shop at its stores. Given the diverse product range Target offers, they might end up buying more.
Expanding In The U.S. – CityTarget In Urban Areas
Despite the weak holiday season, prolonged cold weather and the payroll tax increase, Target’s smaller format CityTarget stores have delivered strong results. Target launched this pilot program last year to expand in densely populated urban areas with space and time constraints. These stores are about 40% smaller than a typical SuperTarget store and offer a range of uniquely tailored merchandise according to the needs of the urban dwellers.  By the end of the first quarter of fiscal 2013, Target operated six CityTarget stores in four cities and plans to add them throughout the U.S. and Canada over time.  The company stated that it will maintain a firm focus on the products that attract frequent store visits. Since Target’s presence in the U.S. is nearing a saturation point, CityTarget stores provide a viable expansion path.
Our price estimate for Target stands at $74, implying a premium of 5% to the market price.Notes:
- US Online Retail Forecast, 2012 to 2017, Forrester, Mar 13 2013 [↩]
- Target’s Q1 fiscal 2013 earnings transcript, May 22 2013 [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]
- M-commerce sales via smartphones hit $8 billion in 2012, Internet Retailer, Jan 16 2013 [↩]
- Google Taps Target For Same-Day Delivery Tests, Business Journal, Mar 12 2013 [↩]
- Introducing Cartwheel: a first-of-its-kind savings program, Target, Mar 8 2013 [↩]
- Target to Expand Cooking and Kitchenware Business with Two E-Commerce Acquisitions, Target, Mar 14 2013 [↩]
- Target’s SEC filings [↩]