How Much Is Target Likely To Grow In The Next Two Years?

Target‘s (NYSE: TGT) 2018 performance has been above its guidance and market expectations so far. The company has been looking to overhaul its business model with the expansion of small-format stores, in addition to revamping its existing stores and improving supply chain management, since the beginning of 2017. In the first half of fiscal 2018, the retailer’s revenue increased 5% year-over-year (y-o-y) to $34.6 billion, primarily due to a strong 4.8% increase in comparable sales. Among the components of the reported comparable sales in this period, traffic grew a solid 5% y-o-y and the average transaction amount declined 0.3% y-o-y. In addition, the company’s digital comparable sales grew 1.3% y-o-y, while store comparable sales grew 3.4% y-o-y. The fact that the company has been able to grow its store comparable sales, despite significant competitive pressure, suggests that its initiatives are resonating well with customers. In terms of the bottom line, the company’s GAAP EPS from continuing operations and adjusted EPS grew almost 15% y-o-y in the fiscal first half. Target benefited from strength in the home, apparel, toys, baby and electronics categories. Notably, Target’s digital sales grew 41% y-o-y in the second quarter after jumping 32% y-o-y in Q2 last year.

Accordingly, we expect Target’s revenue to grow by nearly $5 billion (3% CAGR) through 2019. To arrive at our 2019 net revenue estimates for Target, we have broken down the revenues and estimated separately. We have also created an interactive dashboard analysis which provides a detailed analysis of how to arrive at this growth number. You can make changes to these variables to arrive at your own revenues estimates for the company. We have an $83 price estimate for Target, which is slightly below the current market price.

Target saw its stock decline by nearly 10% in 2017, but it has increased almost 30% over the course of this year. The results of Target’s business transformation have started to show in the company’s financials from Q1 on. However, the retailer’s aggressive push to keep up with Amazon and Walmart, both online and in grocery, is leading to shrinking margins. In the first six months of 2018, Target’s gross margin was 30%, down 20 basis points, largely due to increased fulfillment costs resulting from growth in digital sales. On the cost side, selling, general and administrative (SG&A) expenses grew 7% y-o-y, due to an increase in compensation expenses, reflecting investments in store hours, wage rates and team member incentives. Going forward, we expect this margin pressure to continue in the second half of fiscal 2018 as well, due to higher sales expectations in lower margin categories.

Target plans to leverage its network of stores, and Shipt’s technology platform and community of shoppers, to add same-day delivery to its capabilities. In addition, the company is looking to open 30 small-format stores and remodel close to 325 stores this year. For the full year, the retailer is now expecting an operating margin decline of 30 to 40 basis points on a higher base of expected sales. These expectations translate to a full year outlook for adjusted EPS of $5.30 to $5.50.

We have estimated Target’s total revenue for fiscal 2018 by estimating the number of stores, square footage per store and revenue per square foot in fiscal 2018. We expect Target’s 2018 store count in the U.S. to be around 1850, with an average square footage per store of 306k and revenue per square foot of $133, translating into around $75 billion (+4% y-o-y) in domestic revenues in fiscal 2018.

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