Target Corporation's (TGT) P-fresh remodel program, 5% REDcard Rewards program, City Target stores, The Shops at Target initiatives and its foray into the foreign market are its arsenal to safeguard itself in a still-soft economic recovery.
Initiatives Undertaken
Target’s efficient marketing, multi-channel strategy, product innovation, compelling pricing strategy, and new merchandise assortments, should drive comparable-store sales and operating margins in the long term. We expect the company to gain market share, and believe that more focus on consumable items should boost sales and earnings in a sluggish consumer environment. The company’s long-term objective is to attain $100 billion or more in sales and $8.00 or more in earnings per share by 2017.
The company will focus more on store renovations and improving store sales productivity. This year, Target plans to sustain its remodeling program at existing general merchandise locations, which include an expanded grocery offering, improved store layout and enhancement of in-store shopping experience across departments, such as apparel, home, beauty, shoes and baby. The company plans to complete about 230 more general merchandise remodels in the year.
Management indicated that Target’s P-fresh remodel program and 5% REDcard Rewards program will sustain its sales momentum and continue to drive traffic. The company, in order to attract customers, is also providing an additional benefit of free shipping for any e-shopping, to its cardholders, who are already getting 5% off for the purchases they made.
With ever changing consumer preferences, Target feels the need to adapt to the demands of time and consider consumer-oriented strategies. The recent one, ‘The Shops at Target’, are small boutiques in stores, which are slated to debut on May 6, and are similar to J. C. Penney Company Inc.’s (JCP) store-within-store concept. (Refer to the article: Target’s Road Map Ahead)
Tapping Urban Market
In order to tap the urban markets where real estate remains a constraint, Target plans to introduce smaller-format stores called City Target like its biggest rival Wal-Mart Stores Inc. (WMT). The company informed that the new stores will vary in size from 60,000 to 100,000 square feet compared to its typical format of 125,000–180,000 square feet.
Earlier, Target used to concentrate on the suitability of its large format stores for a particular location, which lowers its accessibility to the country’s thickly populated and space-crunched urban regions. However, with the changing business scenario and rising competition, Target felt the need to have stores of various sizes and formats to align with the targeted area.
We believe that the approach will help the company to augment its sales. Target, will unveil its first smaller format store in Seattle, with plans of opening similar format stores in 10 U.S. cities, including Chicago, Los Angeles, San Francisco, Boston, Baltimore and Miami.
Efforts Reaping Results
Target Corporation posted better-than-expected fourth-quarter 2011 results on the backs of healthy sales, with share repurchase activities also providing cushion to the bottom line. The company delivered quarterly earnings of $1.49 per share that topped the Zacks Consensus Estimate of $1.39 and rose 8.3% from $1.38 earned in the prior-year quarter.
Target now projects adjusted first-quarter 2012 earnings between 97 cents and $1.07 per share. For fiscal 2012, earnings are expected in the range of $4.55 to $4.75 per share. On a GAAP basis, including expenses related to the company’s entry in the Canadian market, management projected earnings between 88 cents and 98 cents a share for the first quarter and between $4.05 and $4.25 per share for fiscal 2012.
Total revenue for the quarter climbed 3% to $21,288 million from the prior-year quarter, and beat the Zacks Consensus Estimate of $21,250 million. Retail sales grew 3.3% to $20,937 million as shoppers are gradually opening up their wallets but still remain wary.
Rewarding Shareholders
Target is actively managing its cash flows and returning much of its free cash to shareholders’ through share repurchases or dividend. These strategies not only enhance shareholders’ return but also raise the market value of the stock. Through this strategy, the companies bolster investor confidence on the stock, and thereby persuade them to either buy or hold the scrip instead of selling off.
During fiscal 2011, the company bought back 37.2 million shares at a price of $50.89 per share, aggregating $1.9 billion. The company now expects to repurchase shares worth approximately $1.5 billion or more during 2012. The company has been consistently raising its dividend for the last 40 years, and expects it to increase to $3.00 per share or more by 2017 from the current $1.20.
The Need to Diversify
The greater concentration of the company’s revenue generating capabilities in limited regions of the United States, poses a competitive threat to Target, compared with Wal-Mart and Costco Wholesale Corporation (COST), which are geographically diverse and more resourceful.
Target is eyeing opportunities in the international markets, such as Canada and Latin America. The company plans to open 125 to 135 stores in Canada by 2013 and 2014. We believe, store openings outside the United States will definitely boost the company’s top and bottom lines and improve its cash flow generation capability.
Tough Economy Still a Threat
The economy has not yet recovered fully. It is evident that the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may affect their discretionary spending, and in turn curtail the company’s growth and profitability.
The global credit markets have recently undergone significant disruption. This may create difficulties for companies to obtain financing on reasonable terms, aggravating the risk of higher cost of borrowings and diminishing the ability to obtain additional financing or refinance existing long-term obligations. This may jeopardize the company’s future growth plans.
COSTCO WHOLE CP (COST): Free Stock Analysis Report
PENNEY (JC) INC (JCP): Free Stock Analysis Report
TARGET CORP (TGT): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis Report
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