Editor's Choice

Target Hits the Bullseye

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

Black Friday kicked off the holiday spending season with a bang. Sales increased by 20.7% year-over-year, according to IBM analytics. The National Retail Federation Department reported that Black Friday sales grew by 16.8% year over year, while Home goods were up +28.2%, and Apparel sales were up +17.5%.

If Grey Thursday and Cyber Monday are eating away at Black Friday like worms through a rotten apple core, how can brick-and-mortar stores compete? Either the consumer pie has grown faster than anyone predicted, or some unlucky kid is going to go home without a slice. Once the euphoria of Thanksgiving weekend lift fades, investors and Wall St. analysts will invariably hunker down and pick the Winners and the Losers.

My vote for Prince Charming is Target Corporation (NYSE: TGT). If I had to pick a frog, it would be J.C. Penney. (NYSE: JCP)

Target is routinely mocked by Soccer Moms throughout North America with the pseudo-French pronunciation Targèt. The reason behind the working stiff/middle class send-up of the Minnesota-based discount retailer is instructive: With its renewed focus on high-end luxury items, Target is widely regarded to be “the upscale Wal-Mart.”

A little Class humor certainly hasn't hurt Target's bottom line. In fact, Target significantly outperformed Wal-Mart (NYSE: WMT), as same store sales grew at 2.9% in Q3, compared to Wal-Mart's SSS of just 1.9%. Target's Q4 guidance blew past Wall St.'s consensus estimates without looking back, despite a 1% decrease in November same store sales.

Clearly, “upscale Wal-Mart” appears to be working. Target's new Neiman Marcus Holiday Collection is doing brisk business with Main Street consumers. What's better is that Wal-Mart is on the verge of cannibalizing its own sales in mature markets, whereas Target still has plenty of room to grow.

On Wednesday, Target joined Wal-Mart, Amazon and Best Buy by sending out emails extending Cyber Monday into “Cyber Week”..Target is also the first major retailer to cross over into Cyber Monday, with online matching price offers. And just in the nick of time: ComScore reported today that Cyber Monday. saw a +17% increase year-over-year.

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Black Friday

J.C. Penney's new CEO Ron Johnson's plan to clean up J.C. Penney by improving the retail experience by introducing wider aisles, better brands, a Starbucks-like coffee bar culture and internet capability is a long overdue development for a company marred by a long, painful decline. Sales have improved remarkably in the J.C. Penney locations where Johnson's retail facelift has been applied. Upgraded stores are making roughly $269 per square foot of retail space vs. $134 per square foot in J.C. Penney's legacy stores.

Unfortunately, these upgraded stores currently account for only around 11% of the total, which means that J.C. Penney's revenue is still being dragged inexorably lower despite the improvements. The resulting cash burn and tight liquidity is slowly strangling J.C. Penney's ability to pivot effectively. The problem isn't Johnson's vision, which clearly works. The problem is that it's hard to turn a boat the size of J.C. Penney around on a dime.

Another worry is the the question of the real estate itself. The question that investors should be asking themselves isn't whether J.C. Penney's new malls-within-a-mall concept is interesting (it is!), but whether “interesting” is even relevant in a country where the importance of malls has been shrinking for a decade.

Two thirds of malls are either in decline or dying. Not only that, but with sales-per-square foot rapidly decreasing, the size of the still healthy malls is actually shrinking. How successful can a revamped business model be if the venue is dead? 65.48% of J.C. Penney's 1,017 department stores are located in this retail space.

Foolish Conclusion

Black Friday's success doesn't guarantee that record turnout will last through Christmas – if anything, it implies that holiday sales are simply being pushed further forward. We can expect to see plenty of revised forecasts before this holiday season is through, as strong Online sales suck the life out of December. Retail is real estate: It's all about location, location, location.

FatalX has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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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