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Summary

  • Company focused on improving Canadian operations and drive U.S. customer traffic.
  • Efforts to improve operations will keep pressure on margins in short term.
  • Same efforts will improve store traffic, market share and profitability in long term.

Target Corporation (NYSE:TGT), one of the key players in the U.S. Retail Chain Industry, is currently a mixed plate of strengths and weaknesses. The data breach issue and the serious supply chain problems in Canada have caused concerns for investors. The company is currently facing problems of declining customer traffic in both the U.S. and Canada. However, with its efforts to expand its market share through competitive pricing and promotions, TGT is well headed to experience an elevated customer traffic level in the long term. In the short term, TGT's margins are compromised with these efforts. Moreover, TGT's strategy to improve the Omni-channel, its online business, is expected to provide revenue and earnings growth in the long run.

U.S. - Making Slow Progress

Competition among U.S. retailers has been quite aggressive in recent quarters. Retailers must have a competitive edge over each other to survive in the highly competitive U.S. Retail Industry. TGT, with its effective pricing policies, stands well among major retailers in the industry. However, following the outcomes of the recent data breach, the company experienced sales pressures for its U.S. segment due to low consumer confidence. However, the company has been working to secure its data and regain/increase customer confidence; the company recently spent $5 million to improve its cyber security.

However, the data security breach adversely affected the recent quarter's sales for the company's U.S. retail segment. Moreover, comparable store traffic was also down 2% year-on-year. In order to restore its customer traffic, TGT ramped up its promotions and pricing discounts. However, the company's initiatives to bring back customer traffic burdened its underlining margins, driving EBIT margin down 17% year-on-year. The company stands firm on its promotional policy to offset the customer loss encountered after the data breach incident. In its recent quarter's earnings conference call, the company's chief executive explained TGT's future efforts to get more customers. "We're working quickly to drive more newness in our merchandising and presentation, helping to keep Target top in mind with guests by continually reminding them why they fell in love with Target in the first place."

I believe the promotional efforts will keep the company's cost base pressurized in the near term, thereby narrowing the underlining margins. But they will well pay off in the long term by increasing its market share with more customer traffic.

Stay Patient about Canada

Canada is a great market and TGT is a great retailer. But the company's Canadian operations have so far been a pressure on its overall profitability. The key challenge to TGT's Canadian operations is the weakness in its supply chain management. The company did try to bring in positive results for Canadian operations by clearing excess inventory on long lead receipts, but still the results for Canada were alarming, with a gross margin of 18.7% in the recent quarter as compared to a 38.7% gross margin for the same quarter the previous year.

TGT is now left with two options about the challenging results of its Canadian base. It could either decide to cut off the Canadian operations or get better results by bringing in more operational improvements. However, the company has decided to bring operational improvements by ramping up promotional intensity in Canada, which will drive more consumer traffic towards TGT. Moreover, I believe the company will be able to improve its Canadian operations in the long run as it learns more about consumer demographics in the region and then makes changes to its operations accordingly. So, investors need to remain patient about its Canadian operations. Also, the company is making efforts to improve the operations; the management expects a 25% year-on-year improvement in sales for 2QFY14.

Omni-channel

The trend of retail purchases via e-commerce is growing at a fast pace. TGT, with its well established Omni-channel, is moving in the right direction to become a leading online retailer in the near term. Up till now, the company is way ahead of its many peers in the industry. The company's recent investments to further uplift digital traffic, both in desktop and mobile, has paid off well. In 1QFY14, TGT not only grew its data traffic by 20% but also noted an uplift of 30% from its Omni-channel sales.

I believe TGT has well realized that it's high time for it to accelerate its Omni-channel efforts, as the company is planning to bring in digital transformation to sustain its top stance in the online business among its peers. With its impressive performance in Omni-channel and future investments, the company is well headed to secure improved conversion rates on its conventional and business sites. The success in its online business is going to fuel its earnings growth for the near future.

Conclusion

TGT, at present, may look a bit disturbing to many investors. But the factors that keep me positive about the company are its focused efforts to improve its Canadian operations, drive U.S. customer traffic, and expand its online business. I believe promotional efforts undertaken by the company to increase traffic and investments made to improve operations may keep pressures on margins in the short term, but in the long run, they will improve store traffic, market share and profitability.

Source: Target: Short-Term Difficulties Cannot Drive Focus Away From Bright Future