Target Reports Weak Q4 Results But Better Times Are Ahead

Target‘s (NYSE:TGT) recently reported Q4 fiscal 2012 results reflected slow growth. The comparable store sales increased by just 0.4% due to lower than expected store traffic, unsuccessful Neiman Marcus collection and the weak holiday season in the U.S. However, some positive trends exist that can help the retailer do better in the future.

Target’s REDcard and pharmacy program helped it register an increase of 1.4% in the average transaction amount. The retailer’s overall revenues increased by 7% due to strong growth in its online sales. ^[1] Target is entering new exclusive partnerships to attract customers, which has been one of its key selling points. Moreover, CityTarget stores continued performing well even during the weak holiday season, and the retailer is all set to open its first store in Canada in April 2013. However, sluggish growth in the U.S. economy, payroll tax increase and Target’s profit sharing with Toronto Dominion bank (for its credit card division) might create small hurdles.

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Reasons Why Fourth Quarter Remained Slow

The U.S. witnessed its worst holiday season since the recession of 2008 due to fiscal cliff concerns and hurricane sandy. Furthermore, due to the sluggish economy and payroll tax increase, U.S. buyers remained cautious regarding their spending. This troubled a number of retailers including Target. The retailer reported a decline of 1% in its store traffic for Q4 fiscal 2012. ^[1] Moreover, its exclusive partnership with high-end retailer Neiman Marcus did not yield the desired results and prompted it to offer heavy discounts even before Christmas. Target slashed the prices by as much as 75%, which was reflected in its comparable store sales growth for December (0%). ^[2]

Why We Think Target Can Do Better Going Forward

Although Target had a weak Q4 fiscal 2012, we believe that its growth can pick up in the future due to the following factors.

REDcard & Pharmacy Rewards: Target’s REDcard reward program still remains a valuable driver of its store traffic. The company has stated that its REDcard customers tend to visit twice as often as its regular customers and spend about 50% more. REDcard penetration increased by about 3% in fiscal 2012, and has nearly tripled in the last two years. ^[2] The retailer’s 5% reward loyalty program allows customers to save money when they shop at Target stores using its brand credit card. Target’s relatively new loyalty program (pharmacy rewards) has also been successful. Pharmacy guests have shopped at Target stores about three times more often and spent 50% more than the non-pharmacy guests. ^[2] In this program, customers gets 5% off on shopping after filling five eligible prescriptions. ^[3] As this gains popularity with Target’s customers, we expect an increase in the number of sign-ups, and subsequently higher sales.

Strong Growth In Online Sales: According to Target’s management, its mobile and online sales grew faster than the industry average. To achieve this, Target has been investing in mobile and website technologies. As a part of this initiative, the retailer recently installed free Wi-Fi in its stores to allow access to its e-commerce. ^[2] As a member of MCX (Merchant Customer Exchange), Target is involved in developing better mobile payment solutions, which should help its mobile channel. Moreover, the broader trend of increasing popularity of online retail channel is likely to aid Target’s growth.

New & Existing Exclusive Partnerships: Target’s continued partnership with popular designer Prabal Gurung has received good customer response despite the weak holiday season. The designer’s collection offers handbags, ready-to-wear, jewelry and shoes at affordable prices. Recently, Target partnered with actor Justin Timberlake to offer exclusive version of his release “The 20/20 Experience“. ^[4] Target will also be collaborating with famous designer Kate Young to create a limited edition collection of women’s apparel, accessories and shoes for the spring season. ^[2] Such partnerships have helped the retailer drive store traffic in the past. The trend is likely to continue as Target expands and renews such partnerships.

Canadian Expansion & CityTarget:- Target is set to open its first 24 stores in Canada by the end of March and will add 100 more by Christmas. ^[2] The retailer expects to generate substantial revenues from the region in the future. It has been a common practice for many U.S. retailers to expand to Canada, and such expansions have been successful. In addition to this, Target’s smaller format stores, CityTarget continued to deliver robust sales even during the weak holiday season. The retailer plans to add three more stores in 2013. ^[2] However, over the course of time, these stores are likely to become an integral part of Target’s business.

Our price estimate for Target stands at $60, which is slightly less than the market price.

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

1. Target’s SEC filings [↩] [↩]
2. Target’s Q4 fiscal 2012 earnings transcript, Feb 27 2013 [↩] [↩] [↩] [↩] [↩] [↩] [↩]
3. Pharmacy Rewards [↩]
4. Justin Timberlake, The 20/20 Experience [↩]