One of the largest retailers in the U.S., Target ( TGT ), operates close to 1,800 stores in the country, spread across 50 states and District of Columbia. The retailer's store fleet consists of four different formats: SuperTarget stores, Target general merchandise stores, expanded food assortment stores, and CityTarget stores. While general merchandise stores offer a limited variety of food items with greater emphasis on other merchandise, SuperTarget stores have full line of groceries and general merchandise in them. As the name suggests, expanded food assortment stores offer a large variety of food items, and CityTarget stores stock their shelves with products that fulfill buyers' daily needs and have high selling frequencies.
Due to its substantial presence in the U.S., Target has been expanding at a slow pace over the past few years, opening just 13 stores on average during 2010 to 2013. While the company hasn't opened or closed any SuperTarget store in the last five years, it has reduced its general merchandise store count substantially. Simultaneously, its expanded food assortment store count has increased more than 10 times. In 2012, Target introduced a new store concept CityTarget to cater to the needs of urban dwellers who prefer shopping at local grocery and dollar stores due to their busy schedule. The retailer opened five such stores in 2012 and added another eight in 2013. Recently, Target developed another small store format known as Target Express encouraged by the success of Wal-Mart Express. As the company's big-box store network nears a saturation point, we expect it to focus more on small store expansion going forward. We project Target's overall store count to increase by about 14-15 every year for the next five-six years.
Big-Box Network Won't Get Too Big
Like any retailer, Target's long term sales and income growth depend largely on its ability to open new stores and expand into new markets. However, due to the retailer's size, it runs the risk of cannibalizing its own sales. In 2009, Target's comparable store sales declined by 2.9%, following 2.5% fall in 2008. At that time, the company operated 1,740 stores in the U.S. and it cited self-cannibalization as an important reason for the decline in comparable store sales in addition to the economic slowdown. If cannibalization was an issue when store count was 1,740, it will be a bigger problem when the count increases. Therefore, we expect the company to slow down the expansion of its typical big-box stores - general merchandise stores and expanded food assortment stores.
Since opening a SuperTarget store (177,000 square feet in size) requires significant space and capital, Target is likely to keep this network stable at 251 stores, like it has for the past five years. While the retailer has reduced its general merchandise store count from 1,443 in 2008 to 289 in 2013, it has grown its expanded food assortment network from zero to 1,245 during the same period. This has been accomplished in a program to convert the form into the latter, utilizing the existing network of stores. Cumulatively, their count has increased from 1,489 in 2009 to 1,534 in 2013 with the addition of 11 stores (average) every year. Going forward, this expansion pace is likely to slow down substantially owing to the threat of self-cannibalization.
Smaller Store Expansion Will Drive Target's Store Count
Target introduced its smaller format concept CityTarget for urban markets about a couple of years ago. A CityTarget store is about 40% smaller than a typical SuperTarget store and offers 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 feet. CityTarget stores have performed very well so far and they delivered high single-digit comparable store sales growth throughout their second year of operation.
In response, the company is developing a separate small format known as Target Express, which is about 15% the size of a general merchandise store. Target is planning to offer private label daily need products such as food, healthcare, beauty and other household essentials in these stores. This strategy appears to be inspired by the tremendous success of Wal-Mart's ( WMT ) smaller stores, Wal-Mart Express, in the U.S. Target will pilot its first Target Express store in July this year, and will plan the format's expansion based on its performance. We believe that there is a lot of expansion room for Target's small stores since Wal-Mart plans to open 270-300 small stores in a single year and some dollar stores operate close to 10,000 stores in the U.S.
What If Target Plans To Ramp Up Its Small Store Expansion?
We currently forecast Target's U.S. store count to increase from 1,793 in 2013 to about 1,890 over the course of next five-six years. However, if the company decides to accelerate its small store expansion, it will end up opening more stores every year than our current projection of 14-15 stores. If CityTarget and Target Express's aggressive expansion drives the store count to 2,100 instead, there can be about 15% upside to our price estimate for Target. This is very much possible considering several expansion opportunities at hand. However, to expand aggressively, Target will have to identify suitable locations of minimum overlap between a CityTarget store and a Wal-Mart Express, which will be an arduous task.