Can Target Continue to Grow?

Ashit is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The extended cold weather and tax hikes impacted U.S. consumer spending during the first quarter of 2013. Target (NYSE: TGT)recently reported first quarter results were disappointing. Same store sales sharply declined, which resulted in Target lowering its annual guidance.

Nonetheless, investors with a long-term horizon should hold on to this stock. Its got a strong product mix, growing presence in Canada, and a digital channel. This along with a pharmacy reward program and Target’s Red card will drive revenue growth well into the future.

First quarter snapshot

The extended winter season in the U.S. led to a fall in demand for summer clothing. In addition, hike in payroll taxes and a delay in tax refunds ensured that U.S. consumer spending did not increase. Target reported a drop of 0.6% in same store sales with about  2% fewer transactions. And while a record coldest March in 17 years had a negative impact on other retailers, as the weather conditions improved, April sales increased.

Focus on e-commerce

In spite of all the weather stuff, e-commerce sales grew at a robust pace.  Online traffic grew, as the e-commerce sales increased 15%, in addition, the mobile-commerce channel (that contributes approximately 30% to Target’s direct to consumer sales), reported a triple digit growth rate.

Influenced by Amazon and Wal-Mart (NYSE: WMT), Target is now experimenting with a same day delivery concept. If the company is successful in amalgamating same day delivery in its e-commerce structure, it can then revolutionize its direct to consumer channel.

Recently, Target, (in collaboration with Facebook), launched a new site called “Cartwheel”. This website enables users to register and access several discounts offered at Target’s retail outlets. Target claims numerous users have registered and approximately 10% of those have already cashed in on some offers. While this may seem insignificant now, the growing popularity of both e-commerce and mobile commerce suggests the number could drastically rise.

Earlier, Target announced it will be acquiring CHEFS catalogue and Cooking.com in order to increase its presence in the online kitchenware market. It plans to integrate the two platforms and create a fully owned subsidiary.

Furthermore, it's now trying to implement a system, where customers can place orders online, and collect the ordered items from one of its stores. Wal-Mart presently offers this service.  Going forward, such initiatives should help Target grow.

Expansion to Canada

The first quarter of 2013 saw Target launching 24 new retail stores on Canadian soil. The stores contributed a healthy $85 million to overall revenues supported by robust performance in the home and apparel categories. In addition, the retailer is shifting focus to other categories such as health, beauty and food. Such initiatives are expected to increase customer footfall in its retail stores.

In fact, Target plans to open 124 stores by the end of this year. Its increasing presence in Canada, and around the globe, will help Target reduce its dependence on the U.S. market.

Diverse product mix

Target has partnerships with several high profile designers, which enables it to offer a diverse and innovative product range. In addition to partnerships with Kate Young and Prabal Gurung, Target recently announced its partnership with Lauren Bush Lauren.

Later this year Target is expected to launch its new lifestyle range of products, that should pump up the apparel, home, sporting, and stationary categories. It also developed a test in order to assess and examine consumer response for its beauty products. Initial response was exceptional, as the entire stock was sold in less than a week. This provided a strong media buzz and positive feedback on several social networking sites.

Competitive landscape of the retailing industry

Similar to Target, Wal-Mart experienced a disappointing first quarter of fiscal. This was primarily due to an increase in pay-roll taxes resulting in declining consumer spending. Unusually long winters led to a decline in sales of seasonal products, as same store sales dropped 1.4%.

But Wal-Mart did report steady growth in markets such as United Kingdom, China, and Brazil. The increase can be attributed to an overall growth in the e-commerce channel in these markets. Furthermore, Wal-Mart's stores in this region reported same store sale growth, as revenue contribution from the international markets grew by 5.4%.

Target also competes with Costco (NASDAQ: COST). Costco generates the highest percentage of its revenues through its operations in the U.S. at around 55%. It owns approximately 448 stores across the U.S and Puerto Rico. I believe Costco presents the biggest threat to Target, as consumers who prefer buying in huge quantities can get better discounts at a Costco warehouse.

Costco is also growing its footprint globally, as the revenue contribution from international markets is accelerating. As per the projections offered by Trefis, revenue contribution from international markets is expected to grow past 25% over the next seven years. Positive growth prospects for U.S. retailers in international markets only supports my bullish view of Target.

Foolish bottom line

Large cap retailers such as Target, Wal-Mart, and Costco would benefit from decreasing dependence on the U.S. and growing presence in international markets. The resources available to such retailing giants will provide continued growth.  E-commerce is also a hot ticket. So despite some recent bumps in the road, you should be a Target bull.

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Ashit Gulati has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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