Target Looking To Drive Revenues Through Smaller Stores

Faced with declining comparable store sales,Target (NYSE:TGT) is is introducing a flexible format store strategy to target new new customers in new markets.  Its current basic- and super-store formats are typically situated in suburban locations and are typically sized at roughly 125,000 and 175,000 square feet, respectively.  Two locations, both smaller size stores, reflect this new strategy. First, the company opened a store less than 15% of the size of its average store near the University of Minnesota campus and stocked its 12,000 square feet with products geared towards college students.  The second location, in New York City’s trendy Tribeca neighborhood, is 45,000 square feet in size and features its own Chobani cafe with merchandise suited to the young professionals and families is the area.

The company believes there could be hundreds of such smaller stores in future and they could be key drivers of growth in the long term. While a similar experiment by Wal-Mart with its “Express” stores did not see much success, Target seems to be focused on attracting younger shoppers by customizing the inventory in these stores to meet the local requirements. Smaller stores come with their own set of challenges of limited shelf and stocking space, higher inventory turnover, and more frequent re-stocking. Merchandising will be key to accommodating the more varied locations and shoppers, so as to maintain an optimal mix of low- and high-margin products. Whether Target’s strategy of focusing on younger shoppers to drive higher sales volumes will result into higher profitability remains to be seen.  In a reflection of these challenges, the company has appointed Anne Stanchfield as Vice President of Flexible Formats and Localization.

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Right Mix Of Inventory Critical For Profitability

Target’s smaller stores are aimed at providing convenience to younger urban and student shoppers by stocking a product mix required by them regularly. The company is looking to target younger shoppers who are more likely to shop online for regular requirements through these stores. Its strategy is to customize the inventory depending on local requirements. The stores will be strategically located in urban areas and college towns.  We believe the right mix of products in these stores will be critical for their success. While the convenience factor can drive revenues, profitability will depend on the kind of products stocked and in demand. A product mix tilted towards low margin items in these stores will not be able to drive profitability for the company in the long term.

We expect Target’s average U.S. revenue per square foot to increase gradually from $311 in 2016 to $ 323 by the end of our forecast period.

We expect smaller format stores to contribute towards this growth and as the company opens several such stores (hundreds according to the management) it should give a boost to the revenue per square per feet. There can be an upside to our price estimate if this number increases at a rapid pace over our forecast period, without impacting the margins of the company.

Target is looking at innovative ways to drive revenues and attract the millennial shoppers who are moving towards online shopping with faster delivery options for their regular needs. While the smaller stores are aimed towards capturing this audience, their success depends on Target’s ability to manage inventory at these stores and offer the right product mix to meet customer requirements and the company’s profitability targets. We remain cautiously optimistic about this strategy and its success will be visible in the coming quarters.

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