Target (NYSE:TGT) struggled in the last two quarters primarily due to weak consumer spending in the U.S. However, that may change when the company reports its Q2 fiscal 2013 earnings on August 21. We expect the retailer’s results to reflect better macroeconomic conditions and the success of its rewards programs. The U.S. retail market showed positive growth during the months of May, June and July due to a slight decline in the unemployment rate.
Also, Target’s international presence is very small, it is important to track its progress on this front. In Q1 fiscal 2013, the retailer opened its first stores in Canada and received positive customer response. Target started its operations in the region by opening 24 stores in March that generated $86 million in sales with gross margin of 38.4% (significantly higher than the U.S. segment).  The company’s performance here will set the tone for its future expansion in other international markets such as Brazil and Mexico.
Target’s Results Will Reflect Slightly Better Economic Environment
During the fourth quarter of fiscal 2012, Target’s comparable store sales increased by only 0.4%, despite an additional accounting week.  This performance resulted from the weakness in overall retail industry, which was going through its worst holiday season since 2008 due to hurricane Sandy and fiscal cliff concerns. At Target, customers avoided buying expensive products and spent more on groceries, small gifts and toys.  In the first quarter of 2013, the U.S. retail market again remained weak due to the prolonged cold season and weak consumer spending on the account of 2% payroll tax increase. These macroeconomic factors translated into 0.6% comparable store sales decline for Target despite its strong online growth. 
However, during the last three months, the U.S. retail market has registered moderate growth which suggests that the country’s economy is improving. In May 2013, retail sales in the region increased by 4.3% compared to the same period a year ago and 0.5% sequentially.   The momentum continued in June and July as well, as the unemployment rate declined.  We expect Target’s second quarter sales to find support from higher discretionary spending resulting from improving consumer confidence.
Target’s Rewards Programs Will Help Drive Store Traffic
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 2012.  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. 
Our price estimate for Target stands at $85, implying a premium of near 20% to the market price.Notes:
- Target Reports First Quarter 2013 Earnings, Target, May 22 2013 [↩]
- Target Reports Fourth Quarter and Fiscal 2012 Earnings, Target, Feb 27 2013 [↩]
- U.S. retailers scramble after lackluster holiday sales, Reuters, Dec 26 2012 [↩]
- Target’s Q1 fiscal 2013 earnings transcript, May 22 2013 [↩]
- United States Retail Sales Y-O-Y, Trading Economics [↩]
- U.S. retail sales fall short of forecast, FT, Jul 15 2013 [↩]
- Retail sales probably climbed in July: U.S. economy preview, Bloomberg Businessweek, Aug 11 2013 [↩]
- Target’s SEC filings [↩]
- Target’s Q4 fiscal 2012 earnings transcript, Feb 27 2013 [↩]