Rewards Program, Canadian Expansion and E-commerce initiative will be the Growth Driver for This Stock

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

Target (NYSE: TGT) has reported a marginal decline in same store sales growth, citing the prolonged winter season and the increase in payroll tax rate. Despite this, the company has achieved a higher Gross Margin and EBIT than the consensus estimates expected, propelled by the category improvement along with the 20 bps improvement from the vendor agreement changes. Management has downgraded its annual guidance, citing sluggish a economic recovery. However, I remain bullish on the group based on its Canadian expansion plans, strong product offerings, its RedCard reward program, and an increase in e-commerce business. Below, I will analyze the strategy mentioned to support my argument.

RedCard and Pharmacy Reward Program will drive the customer to Targets

The RedCard and Pharmacy Reward Program, which provide 5% discounts, have been attracting higher number of customers to the stores. Customers in the reward program have been spending about 50% more than usual. These reward programs have also helped the company to attract new customers, which will help it gain consistent revenue and profit growth.

Canadian expansion will help the company boost its top line and bottom line

Target started operation of 24 stores in Canada in the first quarter of this year. The initial response from the Canadian guests exceeded the street expectations. The gross margin for its Canadian business was 38% significantly higher when compared to 30% for the US market. The company is on track to open 124 stores in the Canadian market. By the end of this fiscal year, the capital expenditure for the opening of new stores will be offset by the profit from the Canadian market.

E-Commerce initiative will help increase online sales

Target's e-commerce business has increased 15% during 1Q FY13. The company has collaborated with Google and eBay for testing its one-day delivery program. If the result from this is positive it will help Target’s direct to customer channel.

The company has also acquired two e-commerce companies--ChEFS Catalog and Cooking.com--in the kitchen and cooking categories, which will help it expand its presence in these two segments. It is also planning to launch online buying service where customers will order online and can pick in stores. Based on the success of a similar program at Wal-Mart (NYSE: WMT), this will help Target improve its comparable store sales.

Other e-commerce initiatives includes Target's newly launched discount website, Cartwheel, in collaboration with Facebook. This has been an instant hit as thousands of customers registered for this, and about 10% have already redeemed some offers.

New product offerings will help bring more customers to stores

Target has been known for its innovation in merchandise. It provides limited but exclusive offerings in partnership with various designers and famous celebrities. The company, based on its past success with this innovation, has tied with more designers and personalities. Target is using the same strategy in Canada. It has partnered with Roots Outfitters, which provide stylish and crafted line for men, women and children. The initial response from this initiative has been positive.

Peer Analysis:

Costco (NASDAQ: COST) is the other major player in the discount store segment. Costco has reported strong second quarter results, with sales up by 8% and earnings up 19% yoy. Due to its industry-leading prices, it has been able to retain and add new members, even as it hiked up its membership fee. The company is on track to open 30 new warehouses each year for the next five years, and it has been aggressively planning to expand in the international market. With less competition in the international market, it can achieve higher market share. According to the company’s management team, the product offerings at its retail stores and online stores are 80% different; it will not have any self-cannibalization effect.

Wal-Mart has been a leader in the discount store segment. As has been the story with most retail companies, Wal-Mart’s comp SSS declined in the 1st quarter. The revenue from both its US and international business also fell last quarter. With fewer new product offerings and discounts, the company will struggle to increase its revenue by more than 1%. In the coming quarter I  believe that Wal-Mart's ROIC will keep on declining, as it has been for the past few quarters.

Conclusion:

Target is trading at a discount when compared to its competitors. I believe its expansion plans in Canada and positive response from the Canadian custome will help the company improve its top line and bottom line in the coming fiscal year. The RedCard and Pharmacy reward program has helped it to retain and acquire new customers, and SSS will increase in the coming quarter. The strategy of opening CityStore and investing in e-commerce has shown positive responses, and e-commerce sales have grown by 15% YoY. I believe the company is poised to show higher growth in the coming financial year, which is why I recommend a ‘buy’ on this stock.

Costco's low prices haven't just benefited customers -- shareholders have walloped the market, returning 11,000% over the past two decades. However, with prices near all-time highs, is the ride over for Costco investors? To answer that and more, The Motley Fool's compiled a premium research report with in-depth analysis on Costco. Simply click here now to gain instant access to this valuable investor's resource.


Gayatri Sharma 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!

blog comments powered by Disqus