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WIKI ANALYSIS
Target Corporation (NYSE: TGT) is one of the top ten largest retailers in the U.S. by sales, and the second largest in the general retail industry. Target generated $64 billion of revenue in fiscal 2008 through sales of apparel, electronics, housewares and other product categories through both online operations and the 1,682 Target stores in the U.S.[1] The company has carved out a niche for itself as a "cheap chic" retailer.
Interestingly, Target does not currently have international operations nor plans to expand overseas in the foreseeable future. Recently, it has become increasingly clear that Target is highly exposed to U.S. macro-economic trends that suppress retail spending, such as rising energy prices, lowering home values and downturns in the economy. Although the company positions itself as a "cheap chic" retailer, consumers are still cutting back on goods such as apparel and electronics, both of which play an important part in Target's total sales. Also, due to the recession that struck the American economy in 2009, the number of credit card delinquencies (charges that have not been repaid) has increased, meaning both of Target's main revenue sources have been adversely affected by the flagging American economy.
Company Overview
Business Segments (Segment contribution to 2008 revenue in parenthesis)
Retail (96.8%)
The retail segment concerns all merchandise and food operations in Target stores as well as the company website. The retail segment itself is made up of different product categories:
- Consumables & Commodities-This segment includes Target's grocery store. It has taken more control over this segment by selling its own private-label brands such as Archer Farms, Sutton and Dodge and Market Pantry.
- Electronics, Entertainment, Sporting Goods, & Toys-Target sells a range of sporting goods and toys, including bikes, golf supplies, camping and outdoors equipment, and toys for children of all ages. In the entertainment section, Target sells a wide selection of music and movies. Target has also been increasing its stock of electronics. Target also participated in the launch of new video gaming systems by selling hardware (consoles), software (games), and accessories (controllers, memory cards). Target Corp. is well positioned for profitability and continued growth in the consumer electronics department.
- Apparel & Accessories-Target stores sell a range of clothing, for men, women, and children, including casual, athletic, and business casual to semi-formal styles. In addition, Target.com sells formal apparel and evening wear. Target also sells shoes and a variety of accessories, from sunglasses to purses to jewelry and watches. GO International, Target's new design initiative, was launched in 2006. Featuring international designers for limited-edition collections, GO International is part of an effort to boost clothing sales and emphasize Target's reputation as affordably trendy and fashion-conscious. Its latest collaboration is "McQ," designed by Alexander McQueen
- Home Furnishings & Decor-In the home decor and furnishings department, Target sells a selection of bedding, linens, and decorative home accents. Target also carries a stock of furniture, including chairs, tables, desks, and bookshelves. The company introduced the Target Casual and Contemporary Home brands in 2006, and also reintroduced the Waverly brand. These Target-owned brands allow the company to keep prices low for customers, while still maintaining profitability for the store.
Credit Cards (REDcards) (3.2%)
Target earns revenue on its credit cards primarily from finance charges and late fees charged to customers. Target also receives revenue in the form of fees from merchants who accept the Target Visa credit card. Net credit card revenues were $1.45 billion in FY08, an 8.8% increase from FY07.[3]
Expenses that Target Corp. incurs by offering credit card services include a provision for bad debt (outstanding balances that can no longer be collected, for example, those from customers who declare bankruptcy). Other expenses include marketing and operating costs associated with promoting and maintaining the Target brand credit card, and the cost of reward programs and new account discounts.
Revenue from finance charges was $1,451 million in 2008, compared to $1,308 million in 2007. Late fees also increased to $461 million from $422 million, in addition to bad debt expense which more than doubled: $481 million in 2007 to $1,251 million in 2008.[3] The increase in all three figures shows that consumers are using Target's credit cards more often in 2008 than they were in 2007. However, the company is also anticipating a larger number of defaults, demonstrated by the increase in bad debt expense. Overall credit segment profit has decreased from 2007($797 million) to 2008($155 million).[3]
On May 19th, 2008 Target sold a 47% stake in its credit card receivables to J P Morgan Chase (JPM) for $3.6 billion dollars cash. Target was previously one of the last big box or department store to maintain a 100% stake in their credit card receivables[4]
Financial Performance
The 2007 Credit Crunch and U.S. recession have affected the company in two ways: first uncertainty about job security and decreasing income brought about by the recession have made customers more reluctant to spend money on items that they do not need. Therefore, clothing and accessories have taken a back burner to necessities such as food and gas. Although revenue increased from 2007 to 2008, profit margin decreased from 4.50% to 3.41%.[2] In addition, the credit crunch has caused alternative sources of income, such as home equity, to dry up, leading to an increase in credit card charges and also a rise in delinquencies(what occurs when a person fails to pay their debt within a certain amount of time). Since Target issues lines of credit to its consumers, it is exposed to the risk of delinquent payments. It's bad debt expense has more than doubled from 2007 to 2008 and the amount of late fees charged to customers has also increased.[3]
In the second quarter of fiscal 2009 (ended August 1, 2009) reported net earnings of $594 million, a $40 million decrease from earnings of $634 million during the same period in 2008. Net interest expense for the quarter decreased $22 million to $194 million, reflecting lower average debt balances.[5] The decreased earnings were caused in part by a 2.7% decrease in store sales.[6]
Trends and Forces
Increase in Credit Card Delinquencies Harms Credit Revenues
Target extends a line of credit to its customers through its REDcards program. As with dedicated credit card companies such as Visa, Target measures bad debt expense each year, which is a total of the number of debts that have gone unpaid, due to the customer defaulting or declaring bankruptcy. Bad debt expense was $481 million in 2007 and increased to $1.25 billion in 2008.[3] The crisis that hit the American economy in 2007 and continued into 2008 has left many consumers with less disposable income, meaning many are more inclined to charge their purchases instead of paying with cash. In one sense retailers that encourage the use of credit cards, such as Target with the REDcards program, are only further incentivising customers to buy goods in their stores. However, with higher amounts of credit card use and the suffering economy come a greater amount of defaults. Despite the increase in credit revenue for 2008, net profit actually decreased from 2007 due to the greatly increased bad debt expense.
High Customer Satisfaction Bolsters Target's Sales in Weak Economy
| Year | 2008 | 2007 | 2006 |
| Comparable Store Sales | -2.90% | 3.00% | 4.80% |
| Number of transactions | -3.10% | 0.30% | 1.10% |
| Average transaction amount | 0.20% | 2.60% | 3.70% |
| Units per transaction | -2.10% | 1.10% | 2.20% |
| Selling price per unit | 2.30% | 1.50% | 1.40% |
With the recession that hit the American economy in 2008 and continues into 2009, consumers throughout America are tightening their purse strings and cutting down on non-discretionary goods. Target's customers are still shopping but they are buying fewer products each time. However, there is a silver lining: satisfaction among Target shoppers tends to be the highest in the country, and 50% of customers rate Target as their favorite place to shop.[8] The Target consumer also tends to be more affluent than the average American and thus has more money to spend. In order to build upon its established foundation of customer satisfaction, Target seeks to make its store a more all-inclusive shopping experience by expanding its grocery segment. The company also aims to cut costs by keeping its inventory lean and further develop its brands in order to convince consumers to use Target for more of their shopping needs (clothing, cosmetics) in addition to solely clothing.[8]
Lack of an International Presence
As the U.S. market becomes increasingly saturated by retail giants such as Wal-Mart (WMT) and Target, companies are beginning to establish a presence overseas in order to seize market share in other countries. Wal-Mart, for example, has stores in Central and South America, Mexico, Canada, Japan, China, and the United Kingdom. The company also plans to open 400 new international locations in 2009. Target's has no stores in other countries and currently has no plans to open any. This fact means it is entirely reliant on the extremely competitive American market and is unable to take advantage of developing economies elsewhere, such as in Asia. Also, the fact that the American market is already so saturated can limit Target's growth. If it constructs too many stores, they will start to cannibalize each other's sales.
Competitors
- Wal-Mart Stores (WMT) is Target's main competitor. The average Wal-Mart customer's income is below the national average whereas the average Target customer's income is above the national average. Target's reputation as "cheap chic" has boosted its cache with relatively affluent "selective" shoppers who purchase consumable household goods at Wal-Mart due to low prices but are not interested in Wal-Mart's apparel or home accessories offerings. These customers frequent Target for their more trendy home furnishings and clothing selection. Target also follows the example of H&M and collaborates with high-profile designers who would normally be outside the price range of their average consumer, such as Alexander McQueen and Thakoon. Target has been competing with Wal-Mart on price, notably matching Wal-Mart's generic drug prices. By keeping its prices low, and extremely close to Wal-Mart's, Target is challenging Wal-Mart's position as the price leader in the discount retail market. However, Wal-Mart currently continues to dominate the market, and WMT's actions greatly influence the entire industry.
| Wal-Mart | Target | |
|---|---|---|
| Total Sales (millions) | $401,244 | $64,948 |
| Growth from 2007 | 7.2% | 2.5% |
| Same Store Sales Increase | 3.5% | -2.9% |
| Sales per Store (mm) | $55.2 | $38.6 |
| Sales per Square Foot (thousands) | $477 | $291 |
- Target also competes with Costco Wholesale (COST), currently the largest membership warehouse retailer. Target and Costco share a similar customer base: the average household income for Costco's customers is $74,000, compared to Target's $70,000. This means Costco competes more directly with Target in terms of consumer base than does Wal-Mart. Costco sells a range of grocery items, electronics, household items, and clothing that rivals Target in product diversity; however, Costco sells products in bulk, whereas Target focuses on individual items and smaller packages. Costco is growing rapidly, with higher revenue than Target and a slightly faster rate of sales growth. The warehouse retailer also generates over 4 times as much revenue per store than Target.
| Target | Costco | |
|---|---|---|
| Revenue ($B, 2008) | 64.9 | 72.5 |
| Number of U.S. Stores | 1,682 | 519 |
| Sales Growth from 2007 | 2.5% | 12.6% |
References
- ↑ TGT 2008 10-K
- ↑ 2.0 2.1 2.2 2.3 2.4 TGT 2008 Annual Report pg. 11
- ↑ 3.0 3.1 3.2 3.3 3.4 TGT 2008 Annual Report pg. 15
- ↑ TGT Q1 2008 Earnings Release
- ↑ Target Post 2Q Earnings
- ↑ Sears not impressive after peers; SHLD, WMT, TGT
- ↑ TGT 2008 10-K pg. 13
- ↑ 8.0 8.1 Target Corporation Q1 2009 Earnings Call Transcript.
- ↑ WMT 2009 Annual Report pg. 1
- ↑ Costco Wholesale Corporation, Google Finance
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