Target’s Earnings May Feel The Impact Of Traffic Decline And Wage Hike

Target (NYSE:TGT) is scheduled to release its Q1 fiscal 2015 earnings on May 20th, and we expect its growth to remain under pressure on account of an industry wide decline in foot traffic. Although the retailer had posted better-than-expected revenue gains in Q4 fiscal 2014, most of that was attributable to a weak comparable period (Q4 2013), when fewer shoppers had gotten out of their homes on account of adverse weather conditions. Therefore, we expect that the company might not be able to repeat that performance in Q1 given that buyers continued to shift to online shopping and the climate in the earlier part of the quarter wasn’t conducive for store shopping. However, there may be a few signs of recovery as the company is gradually shifting its focus back to its known-for categories and has already created significant buzz with its Lily Pulitzer collection. On the bottomline front, while Target is aiming to reduce its expenses by cutting several jobs, it may feel the added pressure of wage hike in April. There were several reports in March claiming that Target is planning to increase its minimum wages to $9 an hour in the following month. Given that Target will be increasing minimum wages across the board, it will see a noticeable impact on its bottomline.

Our price estimate for Target stands at $78, which is just below the current market price.

See our complete analysis for Target

Industry-Wide Traffic Decline Will Weigh On Topline

Store traffic across the industry has declined significantly over the past couple of years, owing the ongoing online shift. Due to growing Internet penetration, proliferation of smartphones and tablets, and the convenience and incentives associated with web shopping, U.S. buyers have been purchasing more online, and are subsequently visiting fewer stores. During the holiday season, industry wide foot traffic fell a sizable 8.3% year over year, according to data compiled by RetailNext. ^[1] In a separate report, RetailNext had reported that store traffic across the U.S. retail market declined 7.7% in January. ^[2] This decline in number of shoppers visiting stores continued in February as RetailNext reported that foot traffic fell 12.5% owing to the online shift as well as prolonged cold weather. ^[3] Though better weather would have encouraged buyers to get out of their homes and traffic would have had some positive impact from the pent-up demand, year over year change in traffic would still have been negative.

Surprisingly in April, store traffic increased 12% compared to the year ago period, probably driven by pent-up demand and Easter weekend, but retail sales growth was negative. According the U.S. Census Bureau, overall sales of general merchandise were down 1.4% in April as consumers remained highly cautious with their spending, and also because the comparable period had accounted for higher sales during the Easter weekend. ^[4] Note that in 2015, Easter sales were accounted in the month of March. Overall, we believe that Target might not have seen any promising growth in revenues in Q1 fiscal 2015.

Wage Hike May Offset Target’s Job-Cutting Efforts

Target is aggressively reducing its workforce, mainly at the corporate level, in an attempt to lower expenses wherever possible. Reducing SG&A expenses as a percentage of revenues has become somewhat of an inevitable step for Target, given that it is unlikely to post significant revenue growth in the near future. The company said in March that it had laid off 1,700 employees and had permanently closed 1,400 openings. ^[5] This was inline with Target’s earlier announcement of cutting several thousand jobs, mostly from the corporate headquarters. Earlier in the year, 17,600 employees were laid off in Canada, as the company decided to exit from the market. After dealing with the severance pay for all these employees, Target said that it will save a significant amount on their wages, and would consequently, get a step closer to achieving its target of $2 billion in incremental savings.

However, for the current quarter, we believe that additional expenses related to severance pay and wage hike would have significantly offset the amount saved on laid off employees and closed positions. Though the announcement wasn’t official, the management had reportedly told its employees that their wages will be revised effective this spring. ^[6] The revision was expected to be around $9 an hour, similar to what Wal-Mart did a few months back. Currently, federal minimum wage is set at $7.25, but many states have raised their respective wages above the national average. In fact, President Obama has proposed a nation-wide revision to $10.10, though this is being opposed by Republicans in Congress. Nevertheless, retailers are now coming forward with wage hikes on their own discretion to attract and retain employees in a more competitive labor market.  Target may have been the latest addition to this list after Wal-Mart and TJX Companies. Target paid its employees more than $7.25 an hour, and it would have incurred significant costs if it did adopt the $9/hour wage structure. The retailer currently has around 366,000 employees and the wage hike is expected to affect all of its U.S. stores. ^[7] This would mean that despite cutting several thousand jobs, Target may not see its savings at a level it initially planned for.

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1. Holiday season U.S. store sales down 8 percent in 2014: RetailNext, Reuters, Jan 7 2015 [↩]
2. RetailNext: January store sales, traffic decline, Chain Store Age, February 6 2015 [↩]
3. Winter Weather Wreaks Havoc on Retail Stores, PR Newswire, Mar 5 2015 [↩]
4. Study: April sales fall despite traffic boost, Chain Store Age, May 8 2015 [↩]
5. Target Cuts 1,700 Jobs Amid Cost Cutting Plan, The Wall Street Journal, Mar 10 2015 [↩]
6. Target could be next to hike minimum wage, CNN Money, Mar 19 2015 [↩]
7. Target hiking minimum wage to $9/hour in April:report, CNBC, Mar 18 2015 [↩]