Weak Holiday Season Will Weigh On Target’s Q4 Results

Target (NYSE:TGT) is scheduled to release its Q4 fiscal 2012 earnings on February 27. In its monthly sales results for January 2013, the retailer reported same store sales growth of just 0.4% for Q4. ^[1] The slow growth can be attributed to the weak holiday season in the U.S. However, a strong response to Target’s clearance sale in January could slightly lift Q4 results.

It will be interesting to see the performance of Target’s CityTarget stores, which are aimed at catering to the needs of the people in urban areas. Moreover, Target has been looking to expand its grocery assortments with its Pfresh remodel program and new grocery ad campaign. The revenue share of Target’s food and pet supplies has increased over the past few years, and we expect the trend to continue. ^[2]

See our complete analysis for Target

Weak Holiday Sales In The U.S. Will impact the results

The U.S. witnessed its worst holiday season in 2012 since the recession of 2008 due to fiscal cliff concerns and hurricane Sandy. ^[3] This had a negative impact on Target as its comparable store sales declined by 1% in November, 2012. ^[4] However, December was slightly better due to the launch of Neiman Marcus holiday collection and the retailer’s price match promise. ^[5] Under the price match strategy, Target promises to match the price for a product if a customer finds a lower price for the same product in the following week’s Target circular, or among more than 25,000 items available with its competitors in the market. ^[6] But this strategy was not enough to outweigh the impact of weak holiday sales and Target’s comparable store sales growth in December remained flat. To sell its excess holiday inventory, Target offered clearance prices on its products. According to the retailer, its customers responded well to this initiative and the comparable store sales grew by 3.1% in January, 2013. ^[1]

REDcard Reward Program Helping Increase Sales

The retailer’s 5% reward loyalty program allows customers to save money when they shop at Target stores using its brand credit card. The program was launched almost two years ago and has been driving store traffic since. The company reportedly saw about 50% higher sales from customers who began using the REDcards in the third quarter of fiscal 2012. In the same quarter, approximately 14% of the retailer’s sales came from REDcard purchases. This is an indicator that many value-conscious customers are switching to REDcard for shopping at Target, and once they sign up, they are buying more. We believe that the success of this program helped mitigate some of the impact of the weak holiday season on Target’s sales.

Update On Performance Of CityTarget Stores

Target started testing its smaller format CityTarget stores around the end of July 2012. CityTarget stores are about 40% smaller than a typical SuperTarget store and offer merchandise catering to the needs of urban dwellers. Target operated five such stores at the end of Q3 fiscal 2012 and plans to open them across U.S. and Canada over time. ^[7] Target has witnessed healthy traffic in these stores so far. It’ll be interesting to see whether these stores delivered a similar performance during the weak holiday season and track Target’s updated plans concerning its expansion.

Penetration Of Grocery Sales Should Improve

Target’s grocery sales (as a percentage of revenues) have been steadily increasing over the past three years. With the retailer expanding its groceries segment through its Pfresh format and new ad campaign, we expect this figure to further improve in fiscal 2012. The grocery market has been lucrative for big retailers such as Wal-Mart (NYSE:WMT) and Costco (NASDAQ:COST), and this has motivated Target to increase its own presence. Not only can Target improve sales, but it can also reduce its business risk as grocery sales are less correlated to swings in the economy.

PFresh is an expanded fresh food layout within Target’s stores which displays frozen and dairy products, perishable items, snacks, beverages and other grocery items. This layout expands the grocery space in a Target store by about 130%. ^[8] Additionally, there are around 90% more food categories and 60% more SKUs (specific kind of units) available at the retailer’s stores.

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

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

1. Target Reports January Sales Results, Target, Feb 7 2013 [↩] [↩]
2. Target’s SEC filings [↩]
3. U.S. retailers scramble after lackluster holiday sales, Reuters, Dec 26 2012 [↩]
4. Target Reports November Sales, Target, Nov 29 2012 [↩]
5. Target Reports December Sales Results, Target, Jan 3 2013 [↩]
6. Our Lower Price Promise, Target [↩]
7. Target’s Q3 fiscal 2012 earnings transcript, Nov 15 2012 [↩]
8. Target To Expand P-Fresh To 350 Stores in 2010, Supermarket News, Nov 18 2009 [↩]