Will This Retail Stock Bounce Back After Disappointing Holiday Season?

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

Jeffries Group and JPMorgan downgraded Target Corporation (NYSE: TGT) due to stiff competition, lower margins and poor online execution. The company was not able to perform well in the holiday season and saw only a nominal growth in comparable same store sale of ~0.8%. Also, its much hyped partnership with Neiman Marcus was a big flop, with the collection selling at a massive 70% discount. I think numerous reasons can be assigned as to why this partnership was a mess, but two highlights for the same would be poor merchandising and high pricing. 

At this position the question which arises is, “Is it a good entry point for investors or will this stock will fall further down?”

I think this stock has been a safe investment in the past. if you aren’t anticipating any windfall gains from your investment, this stock should be a part of your portfolio. Despite its weak performance in the holiday season, I feel that the company’s long-term fundamentals are intact and the economic recovery in the US should further fuel its growth. With the company’s expansion plans in Canada, remodeling of PFresh and REDcard benefits, investors can anticipate upside for this stock.

The Canadian Move: Target's expansion plans for redesigning the Canadian retail outlet, Zeller Incorporated, is in its last stage. The company is expecting to open the new stores by March, 2013 and by the end of the year it will operate ~130 stores in the country. The expected revenue from its Canadian operation is ~$2.2 billion in 2013 with gross profit of ~$660 million. Also, the pricing in Canada is higher than the US market which should benefit its margins. In the Canadian market, Target competes against Costco and Wal-Mart, both of which had an exciting holiday season.

Peer outlook

Wal-Mart Stores (NYSE: WMT): Wal-Mart’s Layaway program was a huge success and the company is expected to have a strong 1Q13 considering the gift cards which were given away in the Layaway program. Along with that Wal-Mart also introduced a new membership pilot program for Sam's Club in Texas which will be extended nationally in 2013. Under the new pilot membership plan, the fee has been raised up by $10 for the business members and $5 for the individual members. Costco Wholesale (NASDAQ: COST) performed better than Target in December, as its comparable same store sales were up by ~9% for the month. Along with that, Costco has been expanding its stores both nationally and internationally. In 2012 it opened 16 new stores and in the coming year it is expected to open ~30 more stores. 

Coming back to Target, the below mentioned initiatives by the company boost my confidence about its strong performance in 2013.

Target’s PFresh Stores: The Company’s plan of integrating PFresh in its stores is nearly complete. As a result nearly 78% of the company's stores have groceries available in them. Currently, the grocery segment of Target contributes ~19% to the total revenue, although, it is quite low as compared to Wal-Mart, which generates ~50% of its revenue from groceries. Pfresh will be rolled out in ~150 stores in 2013 which will help raise the company's comps by ~1.5%. It may prove to be a major source of revenue and will help in increasing the footfalls in other segments of the store too. 

RED loyalty cards of Target: In this reward program the cardholders get a 5% discount on all transactions, free shipping on online transactions and an extended goods return policy of 30 days. This program is already bringing in better than expected results as currently the RED card holders spend 50% more than the non RED card holders. It is estimated that in 2013 the number of card holders will increase by ~40% and will contribute ~$13.7 billion in sales. Buoyed with this success, the company is planning to expand this program even further in Canada in February, which should immensely help its Canadian operations.

To conclude, I think even though Target's sales were a bit low in the holiday season, its future endeavors of expansion, its loyalty programs and its shifting strategy to include grocery products will help the company to strengthen its position. We can expect this stock to give steady returns for 2013.


ShwetaDubey 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