How Is Target’s Store Operating Efficiency Trending?
Target‘s (NYSE: TGT) operating costs have declined notably over the past two years. However, we expect them to remain stagnant over the next two years owing to the company’s cost control measures. Moreover, Target’s running cost per square feet has also been declining over past two years, as the total store square footage has remained more or less stagnant for the company all through. Going forward, Target is foraying into small format stores to reach customers in urban areas, in contrast to the popular large format stores in suburban areas. Target is focusing on populated urban areas and customizing each store to cater to local tastes. For the same reason, the company is closing some of its large stores and planning to open more of the smaller TargetExpress stores and CityTarget stores, typically less than 50,000 square feet compared to the average Target store of 145,000 square feet.
There is also a visible shift in company’s approach towards e-commerce, as the entire retail market is facing a decline in physical stores due to the booming online retail space. As a consequence, the company is planning to use the new stores as pickup locations for online orders. In addition, the retailer is selecting smaller package sizes and few brands for many of the same items offered in bulk at its larger stores with a certain mix of everyday essentials and high-margin merchandise to maximize space and profits in smaller stores.
As can be seen from the table below, Target’s store operating efficiency is improving over the course and we expect this trend to continue in the near term as well. The company’s running cost per square foot is expected to reach $55 in 2017 as compared to $61 in 2014 owing to the company’s efficient management of its expenses.
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Target’s comparable sales have been falling of late, due to the declining traffic that the company is witnessing on both its store and online platforms, partially offset by an increase in the average transaction amount. So, while the company’s results look relatively lackluster at first glance due to the declining comparable sales, it does have a silver lining with the increasing store operating efficiency.
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