The U.S. economy is going through a rough patch, and at such times it is a tough task for the retailers to convince the shoppers to pay big bills.
Using the arsenals of early-hours store openings, huge discounts, promotional activities and free shipping on online purchases, some of the retail companies were able to lure the cautious customers during the holiday season. But all were not fortune enough in getting the best of rewards from their strategic cards.
Target Corporation (TGT), the operator of general merchandise and food discount stores in the United States, posted lower-than-expected December comparable-stores sales of 1.6%, compelling management to trim the earnings outlook. The company now expects fourth-quarter 2011 earnings of $1.35 to $1.43 per share, compared with its earlier guidance of $1.43 to $1.53.
Consequently, Target felt the need to adapt to the demands of time and consider consumer-oriented strategies. The recent one announced by the company is ‘The Shops at Target’, meaning small boutiques in stores.
The new design program, which is in line with J. C. Penney Company Inc.‘s (JCP) store-within-store concept, is slated to make a debut on May 6 at every Target store and will initially run for six weeks. J. C. Penney has incorporated stores of Sephora, MNG by Mango and Call It Spring by The ALDO Group in its store suite.
‘The Shops at Target’ will feature exclusive collections of 400 items from five different specialty stores – The Candy Store, Cos Bar, Polka Dog Bakery, Privet House and The Webster – tailored to cater to the demand of customers with prices ranging from $1 to $159.99.
In line with in-store department concept, Target unveiled another plan of incorporating small Apple Inc. (AAPL) stores across its 25 locations as a test run, which will display products from the maker of Macintosh computers. Target’s stores currently carry products such as, iPads and iPods from Apple.
An enhanced relationship with Target will help Apple aim a wider spectrum of customers. Apple also operates small stores within Best Buy Co. Inc.‘s (BBY) floor space, The New York Times reported.
Additionally, Target has gone a step ahead to further bolster investors’ confidence on the stock by announcing a new $5 billion share repurchase program, which is to be exhausted in 2 to 3 years. The company hinted that it will initiate repurchasing under the new program, after completing its current $10 billion share buyback authorization in early 2012.
The company had bought back 185 million shares at a price of $51.53 per share under its current authorization from the time when it was announced in November 2007 through the third quarter of 2011. Target also informed that in the first three quarters of 2011, it had repurchased 34 million shares worth approximately $1.7 billion. In 2012, the company plans to invest $1.5 billion or more towards share buyback.
The share repurchase activity not only enhances shareholders’ return but also boosts earnings per share and raise the market value of the remaining shares. The company’s long-term objective is to increase its earnings to $8.00 per share or more by 2017.
Another financial mechanism, which Target makes use of to create value for shareholders is through dividend yields. The company has been consistently raising its dividend for the last 40 years, and expects it to increase to $3.00 per share by 2017 from the current $1.20. The company recently declared a quarterly dividend of 30 cents to be paid on March 10, 2012 to shareholders of record on February 15, 2012.
Closing Remark
Target is persistently trying every means to stay afloat in this turbulent environment. The company’s P-fresh remodel program, 5% REDcard Rewards program, City Target stores and its foray into the foreign market are its arsenals to battle the economic upheaval.
Target’s efficient marketing, multi-channel strategy, product innovation, compelling pricing strategy, and new merchandise assortments, should drive comparable-store sales and operating margins in the long term.
The company is eyeing opportunities in the international markets, such as Canada and Latin America. We believe, store openings outside the United States will definitely boost the company’s top and bottom lines and improve cash flow generation capability.
It is evident that the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may affect their discretionary spending, and in turn curtail the company’s growth and profitability.
Currently, we maintain our Neutral rating on the stock. Moreover, Target holds Zacks #3 Rank that translates into a short-term Hold recommendation, and correlates with our long-term view.
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