- Target U.S. constitutes 100% of the Trefis price estimate for Target's stock.
WHAT HAS CHANGED?
- Target Smashes Q1 Comparable Sales
The retailer's comparable sales soared 22.9% in Q1 to smash the consensus mark of +10.7%. Comparable digital sales were up 50.2% during the quarter to account for 18.3% of all sales. In addition, the company generated an adjusted EBITDA of $3.38B vs. $2.18B consensuses. Also, the Gross margin was 30.0% of sales vs. 28.6% consensus, 25.1% a year ago. The gross margin rate is said to reflect the benefit of favorable category mix and merchandising actions, primarily from low markdown rates.
- Operating Margin Came in at 9.8% in Q1 2021
Instead of building out more e-commerce fulfillment centers as was the conventional wisdom at the time, Target decided to put its stores at the center of its omnichannel strategy, leveraging them for same-day pickup. It also acquired Shipt for same-day delivery capabilities. That strategy has underpinned much of the company's growth over the last few years and helped it deliver an operating margin of 9.8% in Q1( vs.6.5% consensus), ahead of rivals like Amazon, Walmart, and Costco.
- Increase in Small- format Stores
Target will accelerate its small-format store openings to 30 to 40 new stores a year, up from a record 29 in 2020. The small-format concept allows the company to penetrate densely populated, underserved areas in cities and college towns, and the format pairs with its omnichannel strategy, allowing for convenient pickup points. Target finished 2020 with 115 small stores, meaning that figure could nearly triple to about 300 over the next five years, according to its growth forecast.
- What To Expect in 2021?
Looking ahead, Target expects positive single-digit comparable sales growth in the last two quarters of the year. In addition, Target expects full-year operating margin rate will be well above last year's rate of 7.0% and is noted to have the potential to top 8.0%.
Target is working to hold onto much of its newly gained market share. The company's exclusive merchandise, including in-store brands and new partnerships with companies like Levi's and Ulta Beauty, combined with its ultra-fast fulfillment to make the retailer a compelling choice for shoppers, whether they were looking for consumer staples or for luxuries like athleisure apparel. This should help it continue to stimulate sales at a time when consumers are consolidating trips. Strong execution in digital, improving inventory position, and a plan to put its large cash balance to work with a share repurchase plan beginning this year - all indicate growth prospects for the company.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of Target's value that present opportunities for upside or downside to the current Trefis price estimate for Target:
- Target's Average U.S. Revenue per Square Foot: Target's average U.S. revenue per square foot increased from $315 in 2018 to $388 in 2020. Going forward, we expect this figure to rise driven by the company's small store expansion, rewards program, and improving online sales. We currently forecast Target's revenue per square foot to reach $403 by the end of our forecast period. However, if the average revenue per square foot grows faster-than-expected due to strong online sales, reaching $415 by the end of our forecast period, there could be a 5% upside to Target's stock price.
- Total Number of Target U.S. Stores: The total number of Target stores has increased consistently, driven in large part by the small-format stores.
We forecast that the retailer's store count will reach around 1,955 by the end of our forecast period. However, if Target manages to expand more rapidly without losing average sales per store, and its store count reaches 1965, there can be an upside of about 5%. This could happen if it penetrates more urban markets with smaller format stores.
For additional details, select a driver above or select a division from the interactive Trefis split for Target at the top of the page.
Target Corporation is among the ten largest retailers in the U.S. by sales. Target generated around $94 billion in revenues in 2020 through the sale of apparel, electronics, housewares, groceries, and other products. It had around 1,897 U.S. stores under operations as of the end of 2020.
Threat of self-cannibalization due to massive size
Like any retailer, Target’s long-term sales and income growth depend largely on the company’s ability to open new stores and expand into new markets. However, due to Target’s size, it runs the risk of cannibalizing its own sales in the US.
Greater focus on groceries to improve store traffic
Consumer spending on groceries can be classified as non-discretionary and is, therefore, less correlated to macroeconomic factors. Target has focused on growing its grocery business due to its non-discretionary nature, in addition to the fact that many customers still prefer to buy groceries in stores rather than online. However, the grocery segment is a relatively low-margin business.
Growth in e-commerce
Target’s online sales do not contribute much to its overall revenues, but they have been growing at a robust pace. We expect this to continue, with the e-commerce business eventually becoming a substantial contributor to the company's overall revenues.