Target’s Growth Remains On Track Despite Tough Economy

Target’s (NYSE:TGT) Q3 fiscal 2012 earnings were on track even as its main competitor, Wal-Mart’s (NYSE:WMT) growth slowed down due to sluggish consumer spending. The retailer’s revenues increased by 3.2% and the same store sales by 2.9%. ^[1] This growth was driven by its 5% REDcard program and strong back to school season. ^[2] As consumers are reluctant to spend in the tough economic environment, Target has been able to hold on to its customers with various initiatives.

The PFresh remodel program launched in 2009 still continues to attract customers. ^[2] As has been the case in last two years, the REDcard reward program continues to be a valuable contributor in maintaining Target’s customer base. Moreover, Target’s pilot program, CityTarget stores have witnessed strong response and seems to be a viable store format for the future. We expect that Target will leverage these factors to sustain its growth amid a tough economic environment.

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REDcard Continues To Drive Growth

Since the launch of this program two years ago, the 5% REDcard loyalty program has been a valuable contributor in driving store traffic. This service allows the customers to save money when they shop at Target stores with its credit card. Since the tough economy in the U.S. has made consumers more price conscious, they now look for price benefits on their shopping.

Target’s REDcard is something that they will find valuable for their day to day shopping. Moreover, Target’s management stated that the sales increased for the need-based items more than the discretionary items. ^[3]

Target’s REDcard’s popularity is evident from the fact that there was an increase of about 50% in the revenues from the households that began using the REDcards in the third quarter. ^[2] This implies that the customers using REDcards are actually buying more. In the same quarter, the retailer registered a record 14% penetration of sales via REDcards. ^[2] Moreover, this figure was nearly three times what it was two years back. This indicates that the value conscious customers are switching to REDcard shopping.

CityTarget’s Success Indicates Bright Future For Target

A CityTarget store is about 40% smaller than a typical SuperTarget store and offers merchandise catering to the needs of urban dwellers. ^[1] The first five stores opened in four states of Chicago, L.A., San Francisco and Seattle witnessed strong response from the customers. ^[2] As smaller stores seem to be the future trend in the urban markets due to space constraints, the success of CityTarget brings good news for the retailer. In the urban markets, the consumers are cautious about spending their time on shopping, and smaller stores provide them with the opportunity to optimize that time.

Target will roll out 3 more CityTarget stores in the next year and plans to add these stores throughout its markets over time. We believe that Target needs to establish a strong hold in the urban markets before the competition intensifies with Wal-Mart’s similar format express stores.

Well Positioned For Holiday Season

Target is well positioned for the upcoming holiday seasons with exclusive partnership initiatives. The retailer will be offering albums of P!nk, No Doubt, Rod Steward, Taylor Swift and Emilio Estefan. ^[2] Partnership with Neiman Marcus and 24 other famous designers in U.S. will enhance Target’s unique collection of merchandise. ^[2] We expect a moderate growth in revenues and comparable store sales in the next quarter.

Our price estimate for Target stands at $60, roughly inline with the market price.

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1. Target’s SEC filings [↩] [↩]
2. Target’s Q3 fiscal 2012 earnings transcript, Nov 15 2012 [↩] [↩] [↩] [↩] [↩] [↩] [↩]
3. Target Profit Rises On Asset Sales, The Wall Street Journal, Nov 15 2012 [↩]