Target’s Plans To Protect Its Bottomline May Get Hindered By Probable Wage Hike

Target‘s (NYSE:TGT) shares have rallied over the past couple of months, following the closure of its loss making Canadian business and better-than-expected revenue growth in the U.S. for the fourth quarter. The company ended its operations north of the border after persevering for two years in the market, where frail customer response and an inefficient supply chain network led to significant losses. Target clocked up close to $1 billion in losses during its first year of operations in Canada, and reported a net loss of $5.1 billion from discontinued operations for the year ending January 31 2015.

Despite a considerable improvement in its domestic performance, Target reported a net loss of $1.6 billion in 2014 mainly on account of the aforementioned factors. Going forward, while the botched Canadian expansion will no longer trouble the company, it needs to employ some strategies to improve its operational efficiency and justify the decision to end its first international venture. To ensure steady topline growth, Target is focusing on a small store expansion, online growth and its iconic “known for” affordable fashion merchandise.

For the bottomline, the retailer has identified several opportunities to improve profitability, both  on its cost of goods and its operating activities. In a financial community meeting held earlier this month, Target mentioned that it expects to save up to $2 billion over the next couple of years, which  will be reinvested in online technologies and the small store expansion. ^[1] However, it has been reported that the company may raise its minimum wage to $9 an hour, following the footsteps of Wal-Mart (NYSE:WMT). ^[2] This could well increase Target’s wage related expenses, offsetting the effects of its cost saving efforts. Also, the company is planning to pay $10 million for the settlement of a lawsuit related to the infamous 2013 data breach. ^[3] This will also have a small negative impact on the retailer’s profits in the near term.

Our price estimate for Target stands at $78, which is just below the current market price.

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Target Plans To Save By Cutting Jobs

The cheap chic retailer is aggressively reducing its workforce, mainly at the corporate levl, in an attempt to lower expenses wherever possible. Reducing SG&A expenses as a percentage of revenues has become somewhat of an inevitable step for Target, given that it is unlikely to post significant revenue growth in the near future. The company said earlier this month that it has laid off 1,700 employees and has permanently closed 1,400 openings. ^[4] This was inline with Target’s earlier announcement of cutting several thousand jobs, mostly from the corporate headquarters. Earlier in the year, 17,600 employees were laid off in Canada, as the company decided to exit from the market. After dealing with the severance pay for all these employees, Target will save a significant amount on their wages, and can consequently, get a step closer to achieving its target of $2 billion in incremental savings.

Higher Wages For Existing Employees Can Offset The Impact

While Target expects to save a substantial amount by cutting thousands of job, it may end up paying higher wages to its existing employees. Though there has not been any official announcement yet, the management has reportedly told its employees that their wages will be revised effective this spring. ^[2] If the “cheap chic” retailer indeed plans to raise its minimum wage, it will most likely pay $9 an hour, similar to what Wal-Mart did a few months back. Currently, federal minimum wage is set at $7.25, but many states have raised their respective wages above the national average. In fact, President Obama has proposed a nation-wide revision to $10.10, though this is being opposed by Republicans in Congress. Nevertheless, retailers are now coming forward with wage hikes on their own discretion and pressure from labor groups, and Target may be the latest addition to this list after Wal-Mart and TJX Companies. Target currently pays its employees more than $7.25 an hour, and it will incur significant costs should it adopt the $9/hour wage structure. The retailer currently has around 366,000 employees and the wage hike is expected to affect all of its U.S. stores. ^[5] This would mean that despite cutting several thousand jobs, Target may not see its savings at a level it initially planned for.

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1. Target’s CEO Brian Cornell Hosts Financial Community Meeting, Mar 5 2015 [↩]
2. Target could be next to hike minimum wage, CNN Money, Mar 19 2015 [↩] [↩]
3. $10 million Settlement in Target Data Breach Gets Preliminary Approval, The New York Times, Mar 19 2015 [↩]
4. Target Cuts 1,700 Jobs Amid Cost Cutting Plan, The Wall Street Journal, Mar 10 2015 [↩]
5. Target hiking minimum wage to $9/hour in April:report, CNBC, Mar 18 2015 [↩]