- In its recent business update, Target lowered its EPS
guidance for the fourth quarter on account of poor comparable
- A heavy decline in foot traffic weighed on Target's sales,
forcing it to project a decline of 2.5% in Q4 comparable
- The company was unable to benefit from the surge in online
orders during the holiday season as its e-commerce channel is
- Target stated that the data breach (revealed in mid
December) was also responsible for its weak sales
- The retailer also unveiled plans to close eight
underperforming stores, which might be the start of store
- If Target does pursue this strategy, there can be a
potential 10% upside to its value
) recently lowered its EPS guidance for the fourth quarter from
$1.50-$1.60 to $1.20-$1.30 on account of weaker-than-expected
sales. Due to a significant decline in U.S. store traffic, several
retailers (including Target) struggled with their sales during the
recently concluded holiday season. Moreover, U.S. buyers were
particularly hesitant with their spending on apparel, which is a
big product category for the company. Although Target has
registered positive comparable store sales growth in the last few
quarters, it is projecting a decline of 2.5% for Q4 fiscal 2013.
This can be attributed to the fact that U.S. buyers bought more
online during the holiday season and Target does not attract
significant web traffic. Additionally, the company said that the
mid-December data breach also played a part in its weak
results. Indeed, its holiday sales were disappointing.
In addition to the aforementioned updates, Target announced
plans to close eight of its stores in the near future after
reviewing their financial performance. While this is not a very
significant development in itself, it might be the start of a store
consolidation. The company operates more than 1,800 stores in the
U.S. and not all are running at their full capacity due to
self-cannibalization. Assuming that the company continues to
identify and close its underperforming stores in the future, its
store productivity can improve.
Our price estimate for Target stands at $74
, implying a premium of around 20% to the market price.
See our complete analysis for Target
Store Traffic Decline And Lower Spending On Apparel
Weighed On Target's Sales
Pressured by increased taxes, slow job growth, higher healthcare
costs, and certain other political and macro-economic factors, U.S.
buyers spent very cautiously last year. This trend was more
profound during the holiday season as the U.S. retail industry saw
its weakest growth since 2009. Moreover, extreme weather conditions
prevented buyers from completing their shopping. As a result, U.S.
foot traffic declined by 19.9% for the week ended December 15, and
21% for the week through to December 22. Overall, foot traffic
during the holiday season decreased by a staggering 14.6%, which
was significantly higher than ShopperTrak's prediction of 1.4%
decline. Furthermore, while U.S. buyers spent freely on
electronics, furniture and building materials, they were reluctant
to spend on clothing. A Reuters poll conducted before the holiday
season found that about 27% of the consumers had planned to spend
less on apparel this holiday season. Since Target earns close to
one-fourth of its revenues from apparel, it was at the receiving
end of this trend.
Shopping Preference Shifted Online And It Din't Favor
Despite the heavy fall in foot traffic, U.S. retail sales
managed a modest growth of 2.7% during the months of November and
December. This is attributable to the fact that U.S. buyers moved
their shopping online since extreme weather conditions kept them
away from stores. Before Christmas, ShopperTrak predicted that U.S.
store traffic will decline by almost 10% on this holiday as
compared to last year. However, the decline in store traffic
somewhat complemented the strong rise in online orders just before
December 25. The surge was such that
United Parcel Service
), one of the largest players in e-commerce delivery, was unable to
deliver several orders on time. Also, apparel retailer Abercrombie
and Fitch (
) saw the revenue share of its online business rise from 16% to 25%
While this trend favored the retailers who drive substantial web
traffic, players with smaller e-commerce channels were unable to
benefit from it. For Target, online revenues account for an
immaterial portion (does not report) of its overall sales.
Therefore, even if the retailer's online revenues had increased
substantially during these two months, a heavy fall in foot traffic
would have easily subdued its impact.
Data Breach Also Impacted Target's Sales
Half way through the month of December, Target revealed that
criminals broke into its database and took guest information
including credit card/debit card data along with names and email
ids of over 70 million customers. In its recent business update,
the company stated that while its sales were going
better-than-expected before the breach, they have been meaningfully
weaker since. We believe that customers moved away from Target as
they felt that their credit card/debit card security had been
Later, Target sent an email to its guest apologizing for the
breach. It also assured its customers that they had zero liability
for the cost of any fraudulent charges resulting from the breach.
As an effort to revive its customers' confidence in the company,
Target is offering one year of free credit monitoring and identity
theft protection. The data breach may have impacted Target's sales
during the holiday season, but its impact will subside as customers
gradually return to the retailer.
Is Target Looking At Consolidation?
In its business update, the company stated that it plans to
close eight stores in the U.S. in May since their financial
performance were not up to the mark. While the company has not
provided any further information related to this matter, we believe
that it might be employing a store consolidation strategy.
Due to its vast presence in the U.S., the retailer operates a
certain number of stores that are cannibalizing each other's sales.
Therefore, along with expanding new, smaller format stores in urban
markets, Target might be considering relocating or closing its
underperforming stores. Though the company earns a huge amount of
revenues from its domestic business (over $70 billion), its EBITDA
margins are low at around 11%. Moreover, costs related to its
Canadian expansion are further eating away its profits. Therefore,
it is clear that Target needs to focus on gradually reducing its
selling general & administrative expenses (SG&A) as a
percentage of revenues, which can be done by improving store
productivity. Along with developing its online channel, and
attracting customers through more groceries and rewards programs,
having fewer underperforming stores may serve the purpose.
We currently forecast Target's SG&A (as a percentage of
revenues) to gradually decline to 16.9% over the next five to six
years due to operating leverage. Assuming that the company
continues to close underperforming stores and brings the
aforementioned figure down to 16.5%, there can be about 10% upside
to our price estimate. However, it still remains to be seen if the
company is actually planning to pursue this strategy or not.
How a Company's Products Impact its Stock Price at