What's Driving Target's U.S. Revenue Per Square Foot?


Quick Take

  • Revenue per square foot is the measure of a retailer's comparable store sales growth and relative sales productivity.
  • Historically, Target's revenue per square foot has been mainly influenced by the economic environment in the U.S.
  • We forecast the retailer's RPSF to remain flat at $300 in 2013 due to the sluggish economic growth, and increase steadily thereafter to reach $380 over the next five-six years.
  • Gradual economic improvement,an increasing share of groceries in the sales mix, the rewards program, the CityTarget expansion and growth in online business will drive the retailer's RPSF.

Revenue per square foot (RPSF) is the measure of a retailer's store productivity, and growth in this metric is a good indicator of comparable store sales growth. More than any other factors, Target's ( TGT ) RPSF has been influenced by economic conditions in the U.S. During the economic downturn of 2008-2009, the retailer's RPSF declined substantially as U.S. buyers spent less on discretionary products. With the economic recovery, the figure started improving and reached $300 in 2012. However, 2013 hasn't been the best year for the company, as consumers have been reluctant to spend.

We forecast Target's RPSF to remain flat in 2013 and improve at a moderate pace thereafter over our Trefis forecast period. In this analysis, we take a look at the factors that are most likely to complement this growth. The economic recovery in the U.S. is likely to get better next year, which should have a positive impact on Target's sales. In addition to macro-economic factors, Target's RPSF should get a boost from its increasing focus on groceries, the expansion of smaller format stores, the rewards program and growth of its online business.

Our price estimate for Target stands at $74 , implying a premium of around 20% to the market price.

See our complete analysis for Target

U.S. Economic Environment Influences Target's Sales

Historically, Target's RPSF growth has followed the pattern of economic growth in the U.S.  Even this year, as the economy has remained sluggish, the retailer has struggled to attain positive comparable store sales growth. According to the IMF, the U.S. economy is likely to improve by a mere 1.6% this year, while it has improved by 2.8% on average over the past four years. Target registered comparable store sales growth of just -0.6%, 1.2% and 0.9%, respectively, in the first three quarters of fiscal 2013. The fourth quarter is not likely to be any better as the retailer had already reduced its hiring in anticipation of weak sales during the holiday season.

Even though the economic growth is positive, consumer sentiment is tepid, at best. Pressured by increased taxes, slow job growth, higher healthcare costs and gasoline prices, U.S. consumers have spent cautiously on discretionary products over the last year. However, the scenario is likely to improve as IMF expects economic growth to pick up in 2014 (+2%) driven by strength in private demand and rising household wealth.

Focus On Groceries For Increasing Store Traffic

Consumer spending on groceries can be classified as non-discretionary and is therefore less correlated to macroeconomic factors. During the recession of 2008-2009, consumer spending on food and beverages remained more or less stable, according to economic data from the Bureau of Economic Analysis. Also, groceries are a big market segment, accounting for annual sales of over $560 billion. Therefore, a retailer needs to have groceries in its arsenal to grow amid the sluggish economic environment in the U.S.

At Target, stores with a partial-line of groceries in them have higher overall sales than stores without groceries. Hence, the retailer has been increasing the revenue share of groceries over the last few years with its P-Fresh store remodel. P-Fresh is an expanded fresh food layout within Target's stores which increases the grocery space by 130% and food categories by 90%. Since its launch in 2009, the retailer has added this format to more than 1,100 of its stores. Also, Target converted about 1,000 of its general merchandise stores to expanded food assortment stores during 2010-2011. The company is even employing some unconventional methods to promote its groceries. At the beginning of 2013, Target came out with an ad campaign that treated grocery items like fashion accessories. Over the last four years, the retailer has increased the revenue share of groceries from 16% to 20%. Although this is a low margin business, it allows the company to drive more store traffic and subsequently generate higher revenue per square foot.

Rewards Program Help In Stimulating Spending

Target's REDcard and pharmacy rewards programs have been important in attracting value conscious customers. The 5% reward loyalty program allows customers to save money when they shop at Target stores using its brand credit card . The company has stated that its REDcard customers tend to visit twice as often as its regular customers and spend about 50% more.

Over the past three years, there has been a significant increase in the total REDcard penetration. From 5.9% in 2009, the figure jumped to 13.6% by the end of 2012. With rising popularity of REDcard shopping, we expect greater store traffic at Target which will aid its comparable store sales growth. Additionally, the company's relatively new loyalty program (pharmacy rewards) might also have some positive impact. Pharmacy guests have shopped at Target stores about three times more often and spent 50% more than the non-pharmacy guests. However, we await further news on the impact of the recent security beach on this group of committed customers.

Expansion Of CityTarget Stores

To continue its expansion in the U.S. urban markets, Target launched its smaller format stores in July 2012. The CityTarget stores are about 40% smaller than a typical SuperTarget store and offer a range of uniquely tailored merchandise according to the needs of urban dwellers. Since these stores offer products catering to a customer's daily needs, they generate high sales per square foot. During the last four-five quarters, these stores have performed well despite the prevailing weakness in the U.S. retail industry. The retailer currently operates only eight such stores, but plans to add them throughout the U.S. in the coming years. This should give a boost to its RPSF going forward.

Growth Of Online Business

Target's online sales do not contribute much to its overall revenues, but they have been growing at a robust pace. During the first quarter of fiscal 2013, the retailer's online revenues increased by 15% while its comparable store sales declined by 0.6%. Given the immaterial contribution and the optimistic outlook of the U.S. online retail industry, it makes sense for Target to focus on its e-commerce channel.

Following the footsteps of Wal-Mart ( WMT ) and Amazon ( AMZN ), Target is testing same-day delivery for its online orders in collaboration with Google ( GOOG ) and eBay ( EBAY ). It is leveraging the power of social media with its "Cartwheel" app in partnership with Facebook (FB), which allows users to log in and gain access to various offers and discounts. The retailer stated that customers have saved more than $10 million since the launch of this app. Additionally, Target is adding new categories to its online product portfolio with various acquisitions such as CHEFS Catalog, Cooking.com, and DermStore Beauty Group. It is also installing free wifi in all its stores to promote the use of its mobile apps. With these efforts, we believe that e-commerce can become a big business for Target in the future, which will complement the growth of its revenue per square feet.

What Is The Significance Of This Metric

We currently forecast Target's U.S. revenue per square feet to increase from $300 in 2012 to $380 by the end of our forecast period. However, if faster than expected economic recovery combined with these efforts push the figure to $420 instead, there can be about 10% upside to our price estimate. Conversely, if economic growth remains sluggish and these efforts fail to bear fruit, limiting RPSF to $340, there can be about 15% downside to our price estimate for Target. Although the company is working hard to improve its comparable store sales, the economic environment in the U.S. will continue to play a crucial role in driving Target's revenue per square feet.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AMZN , EBAY , GOOG , TGT , WMT



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