Back To School Shopping Will Lift Target’s Results

The world’s second largest retailer Target (NYSE:TGT) is scheduled to release its Q3 fiscal 2012 earnings on November 15. ^[1] In its monthly sales results for October 2012, the retailer reported same store sales growth of 2.9% for Q3 — its 12^th consecutive quarter of positive comparable sales growth. ^[2] We believe growth in the third quarter was driven by strong back-to-school and back-to-college seasons and the 5% REDcard reward program.

The performance of Target’s pilot program CityTarget stores and its entry into the Merchant Customer Exchange (MCX) will also be something to watch for. Moreover, Target launched its new home brand Threshold in September, expanded its fall collection for The Shops, and also partnered with singer P!nk during the quarter. ^[3] It will be interesting to see the impact that these initiatives have had on the company’s Q3 earnings.

See our complete analysis for Target

Strong Back-To-School & Back-To-College Seasons

Target reported a 4.7% increase in retail sales in August due to back-to-school and back-to-college seasons. ^[4] The retailer’s initiative to make back-to-school shopping more convenient and cost effective was well-received by parents. Target also launched a program “uStyler” to target tech-oriented college students whereby the students not only can buy online but also create their own dorm room look and share it on social networking sites.

REDcard Reward Program Expected To Continue Driving Traffic

The retailer’s 5% reward loyalty program allows customers to save money when they shop at Target stores using its credit card. The program was launched almost two years ago and has been a valuable contributor in driving store traffic along with the store remodel program. In Q2 fiscal 2012, the retailer reported same store sales growth of 3.1%. ^[3] We expect these factors to have positively impacted this quarter’s same store sales as well.

However, Target recently sold its credit card portfolio to Toronto-Dominion Bank to focus on its retail business and pay off a portion of its debt. The profits will be shared between the two companies and the impact will be visible in fiscal 2013.

Target Remains Susceptible to The U.S. Consumer Spending Trends

Although Target has been able to maintain stable growth in revenues and comparable store sales, it is still susceptible to consumer spending in the U.S. Since the retailer is mainly confined to the U.S., the sluggish growth in economy is likely to weigh on it. In September 2012, the U.S. consumer average daily spending was $74 below the previous month’s average of $77. ^[5] Meanwhile, Target’s same store sales and revenue growth for September were well below the average for the quarter at 2.1% and 2.6% respectively. ^[6]

CityTarget Stores and Other Initiatives

The performance of CityTarget stores, launched at the end of July 2012, will also be in focus. Target plans to add these stores across the U.S. and Canada over time. Hence, their performance will be crucial in the long term. CityTarget stores are about 40% smaller than a typical SuperTarget store and offer merchandise catering to the needs of urban dwellers. With these stores Target is looking to penetrate densely populated urban areas where space is a constraint.

Target is known for its innovative approach to improve store traffic and this quarter witnessed a number of such programs. The retailer partnered with singer “P!nk” to offer deluxe edition of her new album Truth About Love.  Target also launched new brands, Threshold in home décor and Nate Berkus collection in interior design. Further, it added another installment of its “shops” program featuring limited edition tailored merchandise from exclusive boutiques. ^[3] We expect these factors to have had a small positive impact on comparable sales growth.

Our price estimate for Target stands at $60, implying a discount of about 5% with the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Target’s Investor Relations [↩]
2. Target Reports October Sales Results, Target, Nov 1 2012 [↩]
3. Target’s Q2 fiscal 2012 earnings transcript, Aug 15 2012 [↩] [↩] [↩]
4. Target Reports August Sales Results, Target, Aug 30 2012 [↩]
5. U.S. Consumer Spending Slows In September, Gallup, Oct 5 2012 [↩]
6. Target Reports September Sales Results, Target, Oct 4 2012 [↩]