Target (NYSE:TGT), the second largest retailer in the U.S., reported disappointing results in the last few quarters due to the prevailing economic weakness. Moreover, the company is going through a dismal back-to-school season and might not find respite even during the holiday season. In an early forecast, ShopperTrak has predicted a weak holiday season this year on account of cautious consumer spending, a shorter season and a change in shopping trends. 
Last year, Target had hired about 88,000 employees for the holiday season as it was expecting higher sales for November and December. However, it turned out different and the retailer’s comparable store sales increased by only 0.4% due to low store traffic and high markdowns. This year, Target plans to hire only 70,000 holiday employees which appears to be a move in response to the current retail environment.  Fewer employees might help the company slightly reduce its expenses amid low store traffic and weak consumer spending.
Forecast Suggests A Weak Holiday Season
According to the forecast by ShopperTrak, which measures store traffic across 60,000 world-wide stores, the holiday season this year will see its weakest gains since 2009. Retail sales in November and December are expected to rise by just 2.4% while they improved by 3% last year and 4% in 2011 and 2010.  Moreover, the store traffic is likely to fall by almost 1.4%. This is not a pleasing picture given that last year’s holiday season remained weak despite a 2.5% increase in store traffic. 
Although the U.S. economy is gradually recovering, consumers remain cautious about spending. ShopperTrak founder Bill Martin stated that U.S. buyers are concerned about a number of macroeconomic and political issues such as the possible budget fight in Washington and uncertainty over Syria.  Moreover, higher healthcare costs and gasoline prices as well as the payroll tax increase are weighing on consumer spending, which will be reflected in the holiday season.  According to a poll conducted by Reuters, about 33% of consumers are planning to spend less on electronics, toys and jewelry, and 27% are planning to lower their spending on apparel this holiday season. 
The holiday season this year is shorter than the last year which provides a smaller window to capture holiday spending. While there were 31 days between Black Friday and Christmas in 2012, there are only 25 days corresponding this year. Moreover, there will be only four weekends this season (unlike five in 2012) which tend to be the busiest time of the holidays. Also, a number of U.S. shoppers have started diverting their spending to cars and houses in order to take advantage of low interest rates. Subsequently, they are holding back on other products which is negatively impacting retail sales. Recently, the Commerce Department stated that retail sales in August excluding the automotive sector increased by just 0.1%. 
Target Appears To Be Planning Accordingly
For the holiday season 2013, Target plans to hire only 70,000 employees while it hired more than 88,000 last year. Subsequently, it will be offering additional work hours to its existing employees. These extra work hours will be 5%-10% more than what the employees had put in same time last year.  While the company stated that the existing team’s availability and request for more work hours is the main reason behind the decision, this move also appears to be aimed at reducing expenses. Since the sales are expected to be weak and the season will be highly promotional, a slight decline in expenses as compared to the last holiday season can help the company generate higher profits.
Target is not the only retailer making efforts in anticipation of a weak holiday season. The largest warehouse retailer Costco (NASDAQ:COST) has been offering toys with nativity scenes and holiday wrapping paper since August. Wal-Mart (NYSE:WMT) recently started slashing its prices on toys and is ready to go further cheap on them.  Kmart and Sears have already started airing their holiday ads and are also promoting their layway services which allow customers to pay in installments. Also, Toys “R” Us is offering 20% discounts for friends and families who visit its stores through September 21. It has also extended its 90-day return policy to allow customers who buy early to return gifts till January 25. 
Our price estimate for Target stands at $76, implying a premium of near 20% to the market price.Notes:
- ShopperTrak Expects Holiday Sales Will Increase in 2013, ShopperTrak, Sept 17 2013 [↩] [↩] [↩] [↩]
- Target to reduce 2013 holiday hiring, CNN Money, Sept 20 2013 [↩]
- U.S. holiday sales expected to rise less than last year: ShopperTrak, Reuters, Sept 17 2013 [↩] [↩] [↩]
- Forecast Envisions A Weak Holiday Season, The Wall Street Journal, Sept 17 2013 [↩] [↩]
- Target will hire 70,000 holiday workers, 20% fewer than 2012, Los Angeles Times, Sept 20 2013 [↩]