As retailers jockey for prime retail locations and as shoppers value convenience over selection in urban cities, Target (NYSE:TGT) is responding with smaller store formats known as CityTarget. The CityTarget 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.  The changing consumer shopping trends and macroeconomic factors have made the smaller store format a lucrative option for the retailers such as Wal-Mart (NYSE:WMT) and Best Buy (NYSE:BBBY). The consumer response to CityTarget’s opening has been positive, and Target’s move driven by the broader trend in the retail industry will help it sustain growth in its revenues in a saturating market.
Smaller Stores Formats Are Becoming Valuable
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The big box format was booming in the U.S. before the recession of 2008-09.  Slow growth in the U.S. economy has had negative effects on comparable store sales for the big box retailers. For instance, Wal-Mart reported a year-over-year decline in its comparable store sales for several quarters after the recession until Q3 fiscal 2011.  Best Buy also reported profit declines in five consecutive quarters before March 2012. 
Furthermore, the sluggish growth in the U.S. economy has reduced discretionary spending and now customers are less likely to stock up on products beyong their basic needs.With the changing trends, smaller format stores are in a better position as they offer products according to the specific consumer needs. Moreover, as shopping through online channels gains popularity, we could see a greater shift of sales from a retailer’s physical stores to its website. In this scenario, the smaller format stores could better complement e-commerce than a typical big box store as it lower their operating expenses.
However, CityTarget Is Still In The Initial Phase
Target opened its first 3 CityTarget stores in July in Seattle, Los Angles and Chicago and saw a positive response from local shoppers.  Following this success, the retailer recently added another CityTarget store in Los Angles.  It also plans to open a store in San Francisco by the end of October.  Target’s management plans to apply similar formats throughout the U.S. and Canada over time.  The plan is still in its initial phase and is not expected to cause any significant upside to Target’s sales in the near future. However, in the view of changing consumer trends and urban expansion plans, the CityTarget stores will prove to be a valuable addition to the retailer and will have a positive impact on its revenue per square feet in the longer run.
The Primary Strategy Still Is The Big Box Store Expansion
Target has about half the number of Wal-Mart stores in the U.S. and is planning its international expansion with 125 stores in Canada in 2013.  So we expect big box formats to be the main focus of its future strategy and revenue growth. However depending on how the CityTarget stores perform, we could see more of these rolled out in dense urban areas.
Our price estimate for Target stands at $60, implying a discount of about 5% with the market price.Notes: