Why A Focus On Groceries Is Essential For Target?

With comparable sales declining, Target (NYSE:TGT) is looking at ways to increase store traffic. The company generates higher overall sales in stores with groceries and is looking to make itself a more compelling destination for grocery shopping. Recently, the company started building dedicated teams to manage the grocery sections of its stores and as such these employees will no longer work in other parts of the store. Selling groceries is a lower margin retail business, though the company exhibits care in focusing on less perishable grocery items.  The company is struggling to grow its revenues from groceries, so as to generate more traffic throughout the store from food shoppers. Target is taking several initiatives such as adding organic and gluten-free brands, more localized fresh products and better distribution to boost the grocery business. We believe that, as the company witnesses a decline in comparable store sales, it must struggle to improve store traffic to reverse this trend. The need is critical and groceries hold strong potential to drive store traffic for the company.

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A Good Grocery Section Can Increase Overall Store Traffic

While Target is focused on becoming the ultimate one stop grocery, apparel and home destination in the U.S., its turnaround initiatives will take a while to fructify. In Q2 2016 the company’s revenue declined 7% year on year and management issued weak guidance for coming quarters forward. (Read Key Takeaways From Target’s Q2 Earnings).  While the company wants to make food as a driver for store traffic, grocery business is struggling and unable to compete with players such as Wal Mart and Whole Foods.  The company is taking several initiatives  to foster growth, such as offering on more organic products and fresh produce so as to rely less of middle of store dry goods. These measures, along with a dedicated work force for the grocery section, are steps in the right direction to revive the grocery business. The company has already spent $ 1 million per store to improve their look and inventory management in 25 locations in Los Angeles.  These stores now feature new lighting and signage that highlights the organic and fresh produce. Rolling these changes to all 1,800 stores might need heavy investment and hence could take longer. Alternatively, Target could identify critical stores to roll out these changes where high returns can be expected.

According to our estimates, Average Revenue Per Square feet is a key driver of Target’s valuation and high store traffic can drive this metric up.  We expect this number to increase from $ 311 in 2016 to $ 323 by the end of our forecast period. If the average revenue per square feet increases at an annual rate of 2% instead of our estimated number of 1% and reaches $ 353 by the end of our forecast period, there can be a 10% upside to our price estimate.

Target is struggling to grow sales in the U.S. amidst a challenging retail environment, even as it faces tough competition from players such as Wal Mart and e-commerce giant Amazon. As the company works on turnaround initiatives, it will offer a better selection of food products and groceries so as to improve store traffic. It is clear, then, that serious efforts to make its grocery offering competitive are critical to revive this business and drive revenues in the long term.

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