Target Plans Conservatively For The Holiday Season Despite A Promising Industry Forecast

Target (NYSE:TGT), one of the largest retailers in the U.S., has reported disappointing results in the last several quarters due to low consumer spending and the impact of last year’s data breach. Although the company has taken certain measures to win back customer confidence, it hasn’t seen any measurable results. Target’s buyers are still uncertain about their using their credit/debit cards for payments, and the recent Home Depot (NYSE:HD) data breach has further shaken their confidence in large retailers’ cyber security systems. Even before the data breach came to light, Target was struggling to attract customers due to a pullback in consumer spending across the industry. Since the cyber theft news has surfaced, the retailer’s sales have been meaningfully weaker. This may be the reason why Target decided not to increase its holiday hiring levels as compared to last year, even though holiday retail sales are expected to grow almost twice as fast as they did last year.

According to a recent report by Deloitte LLP, U.S. retail sales this holiday season will increase by about 4.0%-4.5%, while they increased by just 2.8% last year. ^[1] Just a few days before this report came out, Target stated that it will hire about 70,000 temporary employees for this year’s holiday season, similar to what it did last year. ^[2] It may be worth noting that Target had reduced its holiday hiring by over 20% last year, as it anticipated the season to be weak. Ultimately, holiday season 2013 turned out weaker than expected for the cheap chic retailer, thanks to the massive data breach. Meanwhile, retail giant Wal-Mart (NYSE:WMT) has increased holiday hiring levels by more than 10%, and it is also giving its existing employees an opportunity to put in more work hours.

Our price estimate for Target stands at $67, implying a premium of more than 5% to the current market price.

See our complete analysis for Target

Expect a Good Holiday Season this Year

Last two years’ holidays weren’t too good for the U.S. retail industry as customers did not spend much, due to a sluggish economic environment and extreme cold weather. However this year, Deloitte LLP expects retail sales to rise by as much as 4.5% during the holiday season, driven by slightly better employment scenario that will encourage consumers to spend more. The New York based consulting firm believes that with unemployment rate falling to close to 6%, U.S. buyers will be more confident in opening up their wallets. In July, inflation adjusted disposable incomes in the U.S. went up by 2.6%, fostering hopes that holiday spending can also rise. However, slowest sales growth since 2009 during the back-to-school season has sparked concerns that holiday season 2014 might not be too lucrative. In a separate forecast, AlexPartners said that this year’s holiday season will be “mediocre” and retail sales will grow by only 3.8%. ^[1]

Deloitte’s report states that direct-to-consumer sales during the season will grow by 14% this year. In 2013, due to unfavorable weather conditions, many buyers turned to Internet for their holiday and gift shopping, which resulted in a surge in online orders around Christmas. The surge was such that United Parcel Service (NYSE:UPS) wasn’t able to deliver many orders on time. This year, it has upped its hiring by a very siazable 73% in order to prevent the recurrence of last year’s delivery debacle. ^[1]

But, Target Appears Obscure about the Holidays

Last year, major retailers across the country made several efforts to grab a sizable share of the U.S. consumer spending during the holiday season. In anticipation of weak sales during November and December 2013, Costco (NASDAQ:COST) launched some of its holiday offerings early, Wal-Mart slashed its prices, Kmart and Sears started airing their holiday ads a couple of months before the season began, and Toys “R” Us offered additional discounts to customers who did their holiday shopping early. Ultimately, U.S. holiday retail sales increased by just 2.8% in 2013 and most of that growth was attributable to the surge in online orders. As a result, retailers who do not have a sizable web presence struggled during the season.

While it is clear that last year’s holiday season was weak across the board, this year Target has a lot more to worry about. The retailer’s Canadian business has had a terrible start and it is unlikely that the segment will do any better during the holiday season. The massive data breach at Target last year and the recent data theft at Home Depot have left buyers with little confidence in credit transactions. Hence, we believe that store traffic at Target will remain sluggish in the near term. Moreover, buyers are expected to make more purchases online, where the company’s presence is very small. Given that Target will have more stores operational by the end of this year as compared to last year, it will be hiring fewer temporary workers per store for 2014 holidays. This clearly indicates that the company doesn’t expect its holiday sales to be too good and hence, isn’t planning to increase its investments.

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1. Deloitte Sees Holiday Sales Rising 4.5% as Incomes Gain, Bloomberg, Sept 24 2014 [↩] [↩] [↩]
2. Wal-Mart holiday hiring lags Target’s, Kohl’s, CNN Money, Sept 18 2014 [↩]