Investing long-term in Target Corporation (NYSE:TGT) may be less certain than the first thought. Imported goods on shelves that are profitable for retailers might not be a sure thing at some point. The ongoing roll-out of self-checkout lanes, while reducing corporate expense, has negative economic and social impact as well.
You're most likely aware of a Donald Trump policy idea that he speaks about in his quest as Republican candidate for US Presidency. Whatever you might think about Donald Trump the candidate, think just about the policy idea for a moment. It is America's ongoing reliance on imported goods from China. He speaks of the resulting loss of American jobs to some exporting countries. As president, Mr. Trump would impose a 45% tariff on all imports from China. He has received popular support from voters on his campaign trail.
If you've never really thought about where some of your purchases started out and how they arrived on the shelf, the tables below can be informative.
Target Corporation, like other retailers, obtains goods that they sell from outside the United States. Sixty-four percent (64%) of all factories turning out Target owned brand products are located in countries other than the US, which contributes nearly 36%.
Target manufactures and acquires merchandise sold exclusively in their stores that ultimately represent about one-third of their total sales. Forty-nine percent (49%) of the TOTAL factories (including US-based) in operation to produce owned brand goods are located in countries determined likely to manipulate their respective currencies in order to maintain an unfair advantage in trade with the United States. These countries are bold type in the tables following. Acquired goods not Target owned brands, but sold exclusively in their stores, probably add some to this percentage.
|number of factories||pct of total number||number of factories||pct of total number||number of factories||pct of total number|
|Source: Global registered factories producing Target owned brand products as of February 15, 2016|
Target owned brand factories are located in countries that seem likely to the US Treasury, in a report, as intervening in the market value of their currencies so that they maintain weakness versus the US dollar (China, Japan, Korea, Taiwan and Germany). This report was key to Senator Michael Bennet's provision in the Trade Facilitation and Trade Enforcement Act.
Senator Bennet comments, "The Treasury Department has taken the initial steps to fight back against countries that manipulate their currency and undercut the hard work of Colorado businesses. We're putting these counties [sic] on notice that we will not tolerate attempts to unfairly make overseas goods cheaper and exports from Colorado less attractive on the global markets. We fought for this amendment to create real consequences that go as far as keeping these countries out of future trade agreements.
Further, debate surrounding the Trans-Pacific Partnership has linked Japan, Malaysia and Vietnam as nearing the definition of currency manipulator since these countries hold large US dollar reserves.
Imported goods subtract from US GDP - automatically weakening the US dollar in and of itself, all other things being equal.
The below table shows a ranking of countries by the US dollar equivalent value of their imported merchandise to the United States in 2015. This gives a sense of scale to supplement the above table, which shows numbers of factories.
|Top 30 Countries Importing Goods to US 2015|
|in millions of US dollars|
|rank||country||2015||pct of World Merchandise Total|
|Top 30 - Total||2,045,419|
|World Merchandise Total||2,240,933|
|Top 30 - % Share||91.3%|
The number of factories found in each country may be interpreted as roughly in proportion to the dollar value import statistics of that country. Proportional except for maybe Canada, Mexico (less) and Vietnam (more).
Yes, this is all apples to oranges. Lacking is a good source of dollar values produced by these factories. Absent that, there is a good argument to apply some logic in arriving at a good approximation of the dollar values by comparing the usual flow of exports to the US from these countries, the number of factories located in each country, and the mix of what is manufactured.
The logic relied on: It is unlikely that hundreds of factories in one country are making only one item each and then just about one factory in another is running at overcapacity. Especially, if considered that the products made in these factories are all somewhat in a range from one dollar to around US$100 in individual retail cost; likely also close in gross margin (see below table). Plus, the item at one dollar is arguably produced in greater quantities than the US$100 item, by the nature of what they are (shirt compared to a bookshelf). Whew.
Target's percentage of US Sales by Product Category. A guesstimate is that the higher margin products are included in Hardlines, Apparel & accessories, some pet supplies, and Home furnishings & decor.
- around 53%+ (13,035M of 24,595M) slightly higher margin Owned AND Exclusive brands products (in bold)
- sixty-four percent of this 53% is foreign-sourced (8,342M), foreign-sourced by direct relationship.
- around 11% of sales
|U.S. Sales by Product Category||Total Year||Owned Brands (Owned and Exclusive Brands approx 1/3 of Sales)||Sales||Owned & Exclusive one-third|
|Household essentials||cleaning supplies, air fresheners, batteries, pest control, laundry care, paper & disposable plastics, tissue & toilet paper, paper towels||26%||up & up®||19,184|
|Hardlines||The 55 percent of the store where general merchandise besides clothing is sold (Target Corp. definition)||17||Circo®, Smith & Hawken®, Embark®, Spritz™, Sonia Kashuk®||12,543|
|Apparel & accessories||19||Merona®, Circo®, Xhilaration®, Ava & Viv®, Gilligan & O'Malley®||14,020|
|Food & pet supplies||21||Archer Farms®, Market Pantry®, Simply Balanced™, Sutton & Dodge®, Wine Cube®, Boots & Barkley® ((pets))||15,495|
|Home furnishings & décor||17||Threshold™, Room Essentials®, Smith & Hawken®||12,543|
|Source: Target Corporation 10-K as at January 30, 2016 (Sales by Product Category percent and Sales amount, Owned Brands)|
A listing of Owned and Exclusive brands that are sold in Target stores. A sampling of Exclusive Brands: manufacturers point to those goods as produced geographically similar to that of Target owned brands.
|Owned Brands||Exclusive Brands|
|Archer Farms®||Market Pantry®||Threshold™||C9 by Champion®||DENIZEN® from Levi's®||Nate Berkus for Target|
|Simply Balanced™||Merona®||up & up®||Cherokee®||Fieldcrest®||Oh Joy!® for Target|
|Boots & Barkley®||Room Essentials®||Wine Cube®||Mossimo®||Genuine Kids® from OshKosh®||Hand Made Modern®|
|Circo®||Smith & Hawken®||Xhilaration®||Liz Lange® for Target||Just One You® made by carter's®||Shaun White|
|Embark®||Spritz™||Ava & Viv®||Kid Made Modern®|
|Gilligan & O'Malley®||Sutton & Dodge®||Sonia Kashuk®|
|Source: Target Corporation 10-K as at January 30, 2016|
If Target decides to reevaluate their sources of owned brand goods and make changes, up to eleven percent (11%) of sales could be affected. If the cost becomes more, those sales will potentially have a higher Cost of Goods Sold.
Target's ongoing roll-out of self-checkout lanes to their stores has impacts. Target has lagged other retailers in implementing the placement of these units in their stores.
- lower labor cost (wages, benefits, employer cost of wages)
- customer now scanning, bagging and lifting (lesser chance of worker injuries)
- need less number of employees (time, effort and expense in reviewing applications; contacting, interviewing, testing, training and orientating new employees).
- cost of machines is purchase price and electricity.
- possibly somewhat lower employee morale
- customer non-use through simply being intimidated by the machine itself and/or the software
- machine breakdown and maintenance issues
Negatives affecting the US economy:
- a machine can't spend money
- less working hours are scheduled overall. Target's employee demographic is mainly young people. These are the segment of the US population that spends most of what they make, in a discretionary way.
- Number of available jobs phased down as a result of less hours that need to be scheduled. This, maybe through attrition and not actual layoffs.
- less wage taxes collected (income, unemployment, social security and miscellaneous other)
- less sales tax collected as less wages earned - that money is unearned, unspent.
- employees who are just about meeting their living expenses may be unable to do so afterward, possibly making it necessary for them to access government social benefits. This strains government budgets. States cannot coin money, only raise taxes or issue bonds.
Some of the products Target stocks are non-cyclical products like food, laundry and personal care, meaning that during a recession shoppers will still be roaming Target stores, looking for bargains on these items. Probably too, some shoppers that are usually found at pricier retail stores.
The number of available jobs at Target likely moves more or less in tandem with sales and how customers flow through the store; from the point that they walk into the store to pick out their purchases and then to paying for them. New job-cut workers may need and apply for these available jobs so they can keep paying bills and for extra money needed to help make ends meet. A Federal Reserve report issued May 2016 (2015 survey data) indicates that forty-nine percent (49%) of American households earning $40,000 or less annually are either "finding it difficult to get by" or "just getting by" with their financial responsibilities. US Census Bureau 2014 data (2015 data still to be released) show that 38% of all US households earn $40,000 or less annually. This percentage stood at 37% in 2010, per referenced data contained in an article by Bridget Quigg at PayScale.com.
With less work hours available due to self-checkout, it could be that these jobs are even harder to find during the next recession, impacting the US economy; with the dollar previously earned from them no longer turning over. This would probably be noticed most by socially responsible investors or like funds.
Target offers products that are used and consumed every day, as well as others like bookshelves, tables and doormats. Some are higher gross margin, others not. Expenses are being reduced through the utilization of technology. All positives for the company that contribute to attractive retail pricing and greater net profit. These the usual components of number-crunching analysis that accompany the decision of whether or not to buy or sell a stock. Factors such as foreign company sourcing of inventory, the effect on the US economy of company decision-making, the ethical considerations and social impact of implementation can all drive those components, perhaps very negatively. All affecting how people feel about the company's brand, as well as affecting the profitability of the company.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: foreign stock I own: RDS-B, DB, ITUB, BBVA, OGZPY