Why We Expect Target’s Revenue Per Square Foot To Rebound
Target (NYSE: TGT) has seen declines in its revenue per square foot (RPSF) at its stores, from $308 in 2015 to below $290 now. We expect the retailer’s revenue per square foot to decline to $284 this year, due to declining foot traffic at its stores. However, the company’s ongoing initiatives could lead to some improvements in the coming years, including small store expansion, growth in online business, increased penetration of REDcard holders and growth in signature categories. These efforts could boost the revenue per square foot marginally and keep it above $290 by the end of our forecast period.
The primary reasons for the RPSF decline in recent years have been competitive pressure, economic pressure and weak product mix. For the same reason, the company witnessed pressure on comparable sales growth brought by declining traffic at brick and mortar stores, driven by small declines in both traffic and average transaction amounts. To add to that, weakness in groceries over the years further led to declining comparable sales.
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Notably, Target generated higher overall sales in stores that offered groceries, and accordingly the company now plans to make itself a more compelling destination for grocery shopping with several initiatives such as adding more organic and gluten-free brands, more local fresh products and better distribution to boost the grocery business. In total, the company’s strategy – which also includes renovating stores, supply chain improvements and increased promotions – will entail an estimated investment of $7 billion over the next 3 years.
Target is in a transitional phase right now, as it is looking to overhaul its business model. The company invested nearly $500 million in the first quarter as part of the store transformation plan, which also included the expansion of small format stores. Going forward, the retailer plans to invest more than $2 billion this year during this phase.
Target is also heavily investing in e-commerce initiatives in order to fend off growing competition from online retailers such as Amazon (NASDAQ:AMZN) and brick-and-mortar giant Wal-Mart (NYSE:WMT). And while Target’s e-commerce presence is strong, it is going to take a lot of effort in order to keep up with these two major competitors. Target is planning to invest in enhanced store experiences, grow its digital initiatives and launch new exclusive brands this year in order to remain competitive in the long term. In fact, Target continues to make a push into e-commerce and an omni-channel model, with recently introduced initiatives such as next-day shipping (Target Restock). The retailer also announced plans to introduce mobile payment features to facilitate convenient payment among its customers, following in Wal-Mart’s footsteps. In Q1 2017, Target’s overall sales declined (-1% y-o-y), while its e-commerce sales continued to grow (22% y-0-y translating to $688.7 million). The company’s online sales accounted for 4.3% of Target’s total sales, up from 3.5% last year.
We expect Target’s revenue per square foot to rebound on the back of growing digital innovations. In addition, better product mix and smaller-format stores could also help the company grow its revenue per square foot going forward. It should be noted that digital sales impact the revenue per square foot in our current model.
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