netrashetty
Netra Shetty
Target Corporation (simply known as Target) is an American retailing company that was founded in Minneapolis, Minnesota in 1902 as the Dayton Dry Goods Company. In 1962, the company opened its first Target store in nearby Roseville. Target grew and eventually became the largest division of Dayton Hudson Corporation, culminating in the company changing its name to Target Corporation in 2000. As of May 2010, the company has opened stores in every state except Vermont, operating as Target or SuperTarget.
Target is the second largest discount retailer in the United States, behind Walmart.[6][7] The company is ranked at number 30 on the Fortune 500 as of 2010, and is a component of the Standard & Poor's 500 index. The company licenses its bullseye trademark to Wesfarmers, owners of the separate Target Australia chain.
On January 13, 2011, Target announced its expansion into Canada. Target will operate 100 to 150 stores in Canada by 2013, through its purchase of leaseholds from the Canadian chain Zellers.
Target Corporation (NYSE: TGT) is one of the top ten largest retailers in the U.S. by sales. Target generated $65.4 billion of revenue in fiscal 2009 through sales of apparel, electronics, housewares and other product categories through both online operations and the 1,740 Target stores in the U.S.[1] Target reported $936 million earnings in Q4 2009 as it received a boost from the holiday season. Target has carved out a niche for itself as a "cheap chic" retailer.
Recently, it has become increasingly clear that Target is highly exposed to U.S. macro-economic trends that suppress retail spending, such as rising energy prices, lowering home values and downturns in the economy. Although TGT positions itself as a "cheap chic" retailer, consumers are still cutting back on goods such as apparel and electronics, both of which play an important part in Target's total sales. Also, due to the recession that struck the American economy in 2009, the number of credit card delinquencies (charges that have not been repaid) has increased, meaning both of Target's main revenue sources have been adversely affected by the flagging American economy.
In January 2011, Target took its first step in expanding outside of the US with the purchase of 220 Zellers stores in Canada. Target plans to convert 100 to 150 of these stores by 2013 or 2014, with revenues similar to those of its US counterparts.[2]
Company Overview
Financial Performance
Contents
1 Company Overview
1.1 Financial Performance
1.1.1 Fiscal Year 2009 (Ended January 30, 2010)
1.1.2 Q1 FY 2010 (Ended May 1st, 2010)
1.1.3 Q2 FY 2010 (Ended August 1, 2010)
1.1.4 Q3 FY 2010 (Ended November 1, 2010)
1.2 Business Segments
1.2.1 Retail (97% of Fiscal 2009 Revenue)
1.2.2 Credit Cards (REDcards) (3% of Fiscal 2009 Revenue)
2 Trends and Forces
2.1 High Customer Satisfaction Bolsters Target's Sales in Weak Economy
2.2 Target expands its profit potential as it enters international markets
2.3 Launch of New REDcard Program Increases Sales Amid Decreases in Credit Card Defaults
2.4 Increases in Commodity Prices Will Raise Clothing Retailer Prices
3 Competitors
4 References
The 2007 Credit Crunch and U.S. recession have affected Target in two ways: first uncertainty about job security and decreasing income brought about by the recession have made customers more reluctant to spend money on items that they do not need. Therefore, clothing and accessories have taken a back burner to necessities such as food and gas. With the revenue increase from the 2009 FY, gross margin increased 0.7% to 30.5%.[1] In addition, the credit crunch has caused alternative sources of income, such as home equity, to dry up, leading to an increase in credit card charges and also a rise in delinquencies(what occurs when a person fails to pay their debt within a certain amount of time). Since Target issues lines of credit to its consumers, it is exposed to the risk of delinquent payments.[3]
However, its credit card programs have improved, with its bad debt expense decreasing 5.3% and its amount of late fees charged to customers decreasing 24% from 2008.[4] The launch of the new REDcards program for Target's credit card in June 2010 offered 5% off at check-out for every purchase made with a REDcard and a 10% discount for every 10 prescriptions filled at a Target pharmacy with a REdcard. This program is aimed at existing Target shoppers, with the hopes that they will spend more at Target. This has reaped rewards such as improved consumer traffic in stores and a 5.5% increase in comparable store sales in November 2010.[5][6] November 2010 net sales were $6.01 billion, which was an increase of 6.7% from the same period a year ago.[7]
In order to improve its sales, TGT has also improved its stores with more space, expanded offerings, and a new design to make its products and stores seem more upscale. TGT aims to improve sales at each remodeled store by as much as 10% and on average, these stores have already exhibited 6-7% increases in sales. 400 stores are set to be made over before the end of the year and another 400 will be converted in 2011 out of TGT’s 1750 stores.[8]
Fiscal Year 2009 (Ended January 30, 2010)
For the fiscal year, Target had mixed results across the four quarters. Compared to fiscal 2008, the retailer had sluggish performance in the first two quarters, followed by strong results in Q3 and Q4. In particular, Target had a strong Holiday Season, where it had a 54% increase in net income compared to the Holiday Season in fiscal 2008.[9] Quarterly highlights are found below.
In Q1 fiscal 2009, TGT posted net income of $522 million, a 13.2% decrease from the Q1 fiscal 2008 amount of $602 million. [10] In Q2 fiscal 2009, Target reported net income of $594 million, a $40 million decrease from earnings of $634 million during Q2 fiscal 2008.[11] Q3 fiscal 2009 was more profitable for Target, as the retailer reported net income of $436 million, compared to $369 million in Q3 fiscal 2008.[12] In addition, Target's EPS increased 18.6% to $0.58 from Q3 fiscal 2009,[12] showing strength going into the Holiday season. Q4 EPS increase 53.3% to $1.24 compared to Q3 2008 [9] Net sales were $19.7 billion, a 3.7% increase over the same period last year [9] Net income was $936 million, up from $609 million in Q4 2008 [9]
Year Operating Revenue (millions) Operating Profit (millions) Operating Margin Net Income (millions) Net Profit Margin Same Store Sales Change
2009 $65,357 $4,673 7.1% $2,488 3.8% (2.5%)
2008 $64,948 $4,402 6.8% $2,214 3.4% (2.9%)
2007 $63,367 $5,272 8.3% $2,849 4.5% 3.0% [13] [14]
Q1 FY 2010 (Ended May 1st, 2010)
Target reported net sales of $15.158 billion -- a 5.5% increase from Q1 fiscal 2009.[15] Revenue from Target's REDcards business totaled $435 million -- a 7.9% decrease compared to Q1 fiscal 2009.[15]
The net sales increase was driven by comparable store sales growth of 2.8%.[15]
Target posted net income of $671 million -- a 28.6% increase compared to Q1 fiscal 2009.[15]
The strong net gain was reflected in Target's EPS of $0.90 for the quarter -- a 30% increase compared to Q1 fiscal 2009, and the highest quarterly EPS in the retailer's history (excluding holiday-driven Q4 results).[15]
Q2 FY 2010 (Ended August 1, 2010)
Sales increased 3.8% in the second quarter to $15.1 billion in 2010 from $14.6 billion in 2009, due to the contribution from new stores combined with a 1.7% increase in comparable-store sales.
Net income was $679 million compared with $594 million in Q2 in 2009.
EPS increased 17% to 92 cents from 79 cents in the same period a year ago.
EBITDA and EBIT margin rates were 10.5 percent and 7.2%, respectively, compared with 10.6% and 7.3% in 2009. [16]
Q3 FY 2010 (Ended November 1, 2010)
TGT reported that its third quarter earnings increased by 22.7% to $535 million. Revenue rose 2.2% to $15.61 billion.[17]
The firm posted EPS of 74 cents per share, which beat Wall Street earnings estimates of 68 cents per share.[17]
Sales increased 3% to $15.2 billion compared to the same period from a year ago. Comparable store sales increased 1.6%. This is largely due to contribution from new stores and an increase of 3.2% in retail segment earnings
Third quarter gross margin was 30.6%, which is down from 30.8% from a year ago.[18]
Business Segments
Retail (97% of Fiscal 2009 Revenue)
The retail segment concerns all merchandise and food operations in Target stores as well as the company website. The retail segment itself is made up of different product categories:
Target maintained well-balanced product sales in fiscal 2009.[19]
Household Essentials -Target sells various household items in this business, ranging from pharmaceuticals and beauty products to cleaning and paper products.[20]
Hardlines-Target sells a range of sporting goods and toys, including bikes, golf supplies, camping and outdoors equipment, and toys for children of all ages. In the entertainment section, Target sells a wide selection of music and movies. Target has also been increasing its stock of electronics. Target also participated in the launch of new video gaming systems by selling hardware (consoles), software (games), and accessories (controllers, memory cards). Target Corp. is well positioned for profitability and continued growth in the consumer electronics department.
Apparel & Accessories-Target stores sell a range of clothing, for men, women, and children, including casual, athletic, and business casual to semi-formal styles. In addition, Target.com sells formal apparel and evening wear. Target also sells shoes and a variety of accessories, from sunglasses to purses to jewelry and watches. GO International, Target's new design initiative, was launched in 2006. Featuring international designers for limited-edition collections, GO International is part of an effort to boost clothing sales and emphasize Target's reputation as affordably trendy and fashion-conscious. Its latest collaboration is "McQ," designed by Alexander McQueen
Home Furnishings & Decor-In the home decor and furnishings department, Target sells a selection of bedding, linens, and decorative home accents. Target also carries a stock of furniture, including chairs, tables, desks, and bookshelves. TGT introduced the Target Casual and Contemporary Home brands in 2006, and also reintroduced the Waverly brand. These Target-owned brands allow the company to keep prices low for customers, while still maintaining profitability for the store.
Food and Pet Suppiles-This segment includes Target's grocery store. It has taken more control over this segment by selling its own private-label brands such as Archer Farms, Sutton and Dodge and Market Pantry.
Credit Cards (REDcards) (3% of Fiscal 2009 Revenue)
Target earns revenue on its credit cards primarily from finance charges and late fees charged to customers. Target also receives revenue in the form of fees from merchants who accept the Target Visa credit card. Net credit card revenues were $1.92 billion in FY09, down from $2.06 billion in FY2008.[1]
Expenses that Target Corp. incurs by offering credit card services include a provision for bad debt (outstanding balances that can no longer be collected, for example, those from customers who declare bankruptcy). Other expenses include marketing and operating costs associated with promoting and maintaining the Target brand credit card, and the cost of reward programs and new account discounts.
Revenue from finance charges was $1,450 million in 2009, compared to $1,451 million in 2008. Late fees decreased from to $461 million from $349 million, in addition to bad debt expense, which more than doubled in FY2008, decreased to $1.19 billion, down from $2.06 billion in 2008.[1]
On May 19th, 2008 Target sold a 47% stake in its credit card receivables to J P Morgan Chase (JPM) for $3.6 billion dollars cash. Target was previously one of the last big box or department store to maintain a 100% stake in their credit card receivables[21]
Trends and Forces
High Customer Satisfaction Bolsters Target's Sales in Weak Economy
With the recession that hit the American economy in 2008 and 2009, consumers throughout the U.S. are tightening their purse strings and cutting down on non-discretionary goods. Target's customers are still shopping but they are buying fewer products each time. However, there is a silver lining: satisfaction among Target shoppers tends to be the highest in the country, and 50% of customers rate Target as their favorite place to shop.[22] Once consumers gain more confidence in the economy, Target may be where they return to shop because of their positive shopping experience. According to the American Customer Satisfaction Index's (ACSI) Fall 2010 study, Target scored an 82 in customer satisfaction compared to a 71 for Wal-Mart Stores. [23] The Target consumer also tends to be more affluent than the average American and thus has more money to spend. In 2010, Target is focusing more on store renovations and enhance store sales productivity, including introducing smaller format stores. [22]
Year 2009 2008 2007 2006
Comparable Store Sales -2.5% -2.9% 3.0% 4.8%
Number of transactions -0.2% -3.1% 0.3% 1.1%
Average transaction amount -2.3% 0.2% 2.6% 3.7%
Units per transaction -1.5% -2.1% 1.1% 2.2%
Selling price per unit -0.8% 2.3% 1.5% 1.4%
[24] [25]
Target expands its profit potential as it enters international markets
In its first expansion outside of the US, Target bought leases for 220 Zellers stores, one of Canada’s largest mass-merchandise retailers, in Canada for $1.825 billion.[26] Target plans to open 100 to 150 stores by 2013 and 2014 and the remaining stores will be taken up by Target or converted by other brands. [27] As the US market becomes increasingly saturated by retail giants, such as Walmart, companies are beginning to establish a presence overseas in order to seize market share in other countries Wal-Mart, for example, has over 4,000 stores in Central and South America, Mexico, Canada, Japan, China, and the United Kingdom. International sales contributed 25% to Wal-Mart's 2009 sales. [28] With these plans for international expansion, Target is now positioned to compete with Walmart with revenue from international sales. Target has also considered opening stores in Mexico and Latin America in the next 3-5 years.[29]
Launch of New REDcard Program Increases Sales Amid Decreases in Credit Card Defaults
Target extends a line of credit to its customers through its REDcards program. In June 2010, Target announced a new program that offered 5% discounts for every purchase made with a REDcard and a 10% discount for every 10 prescriptions filled at a Target pharmacy with a REDcard. This program is meant to encourage existing Target consumers to spend more, especially during the holiday season, as discretionary spending eases up. Target's sales have increased since the launch of the program, especially with a 5.5% increase in comparable store sales in November 2010. This is significantly higher than the 1.6% comparable store sales growth of the Q3 2010.[5] The program is expected to add about 1% to comparable store sales in Q4 2010 and 1-2% in comparable store sales for 2011.[30]
The 2008 financial crisis left many consumers with less disposable income, leading to the inclination to charge their purchases instead of paying cash. However, a 2009 upturn led to a 5.3% decrease in TGT's bad debt expense and a 24% decrease in its amount of credit card late fees from 2008. As a result, with more incentives for consumers to buy goods in Target's stores, TGT's sales can benefit, as long as there are not a large amount of defaults.[4] This program will also help reduce the general perception that Target's products are more expensive than Wal-Mart's by coming close to matching Wal-Mart's prices. The program is also beneficial in identifying and analyzing customer demographics to allow for more effective marketing.[30]
Increases in Commodity Prices Will Raise Clothing Retailer Prices
In 2010, cotton consumption exceeded cotton production for the fifth year in the row, making cotton prices increase by 80.5% from last year.[31] [32] In 2009, natural disasters also severely damaged crops in many large cotton producer countries, such as China, India, and Pakistan. This led to decreases in cotton exports from these countries and increases in cotton imports as these countries sought to supplement their supply of cotton. [33][34] With limited cotton supplies and rising prices, retailers will either have to absorb these higher material costs, restructure the composition of their clothing to have less cotton, or pass these higher costs to its consumers. Higher clothing prices or lower quality clothing could discourage consumer spending, resulting in decreased net sales. However, adult or teen clothing retailers may not be too adversely affected as their clothing (which is usually 30-40% cotton based) has more flexibility in their composition and thus, costs.
In addition, raising commodity prices in other areas will also raise costs for retailers. The price of shipping a 40-foot dry container from China to the US has increased by 90% since 2009. Lumber and coal prices increased 36.3% and 23.7% from last year, respectively, while oil prices increased by 40% in early 2010 but has now decreased back to a steady single digit increase for the year.[31] While premium price and established brands may be able to pass their higher costs to their consumers, value based companies may not fare as well and may suffer from lower profit margins.[31]
Competitors
Wal-Mart Stores (WMT) is Target's main competitor. The average Wal-Mart customer's income is below the national average whereas the average Target customer's income is above the national average. Target's reputation as "cheap chic" has boosted its cache with relatively affluent "selective" shoppers who purchase consumable household goods at Wal-Mart due to low prices but are not interested in Wal-Mart's apparel or home accessories offerings. These customers frequent Target for their more trendy home furnishings and clothing selection. Target also follows the example of H&M and collaborates with high-profile designers who would normally be outside the price range of their average consumer, such as Alexander McQueen and Thakoon. Target has been competing with Wal-Mart on price, notably matching Wal-Mart's generic drug prices. By keeping its prices low, and extremely close to Wal-Mart's, Target is challenging Wal-Mart's position as the price leader in the discount retail market. However, Wal-Mart currently continues to dominate the market, and WMT's actions greatly influence the entire industry.
Target v. Wal-Mart (US), 2009
Target Wal-Mart
Total Sales (millions) $63,435 $404,046
Growth from 2008 0.9% 1.0%
Same Store Sales Increase -2.5% -0.8%
Sales per Store (mm) $36.4 $48.0
Sales per Square Foot (thousands) $274 $424
[35] [36]
Target also competes with Costco Wholesale (COST), currently the largest membership warehouse retailer. Target and Costco share a similar customer base: the average household income for Costco's customers is above $75,000, compared to Target's $70,000.[37] This means Costco competes more directly with Target in terms of consumer base than does Wal-Mart. Costco sells a range of grocery items, electronics, household items, and clothing that rivals Target in product diversity; however, Costco sells products in bulk, whereas Target focuses on individual items and smaller packages. Costco's strategy of buying large quantities of a product when it is cheap makes it a formidable competitor as it is able to keep its product costs down amidst rising prices.[37][38]
Target v. Costco Wholesale (COST)
Target Costco
Net Income ($B, 2009)[39][40] 2.49 1.09
Number of U.S. Stores 1,740 566
Net Income Growth from 2008 12.4% -14.8%
Target is the second largest discount retailer in the United States, behind Walmart.[6][7] The company is ranked at number 30 on the Fortune 500 as of 2010, and is a component of the Standard & Poor's 500 index. The company licenses its bullseye trademark to Wesfarmers, owners of the separate Target Australia chain.
On January 13, 2011, Target announced its expansion into Canada. Target will operate 100 to 150 stores in Canada by 2013, through its purchase of leaseholds from the Canadian chain Zellers.
Target Corporation (NYSE: TGT) is one of the top ten largest retailers in the U.S. by sales. Target generated $65.4 billion of revenue in fiscal 2009 through sales of apparel, electronics, housewares and other product categories through both online operations and the 1,740 Target stores in the U.S.[1] Target reported $936 million earnings in Q4 2009 as it received a boost from the holiday season. Target has carved out a niche for itself as a "cheap chic" retailer.
Recently, it has become increasingly clear that Target is highly exposed to U.S. macro-economic trends that suppress retail spending, such as rising energy prices, lowering home values and downturns in the economy. Although TGT positions itself as a "cheap chic" retailer, consumers are still cutting back on goods such as apparel and electronics, both of which play an important part in Target's total sales. Also, due to the recession that struck the American economy in 2009, the number of credit card delinquencies (charges that have not been repaid) has increased, meaning both of Target's main revenue sources have been adversely affected by the flagging American economy.
In January 2011, Target took its first step in expanding outside of the US with the purchase of 220 Zellers stores in Canada. Target plans to convert 100 to 150 of these stores by 2013 or 2014, with revenues similar to those of its US counterparts.[2]
Company Overview
Financial Performance
Contents
1 Company Overview
1.1 Financial Performance
1.1.1 Fiscal Year 2009 (Ended January 30, 2010)
1.1.2 Q1 FY 2010 (Ended May 1st, 2010)
1.1.3 Q2 FY 2010 (Ended August 1, 2010)
1.1.4 Q3 FY 2010 (Ended November 1, 2010)
1.2 Business Segments
1.2.1 Retail (97% of Fiscal 2009 Revenue)
1.2.2 Credit Cards (REDcards) (3% of Fiscal 2009 Revenue)
2 Trends and Forces
2.1 High Customer Satisfaction Bolsters Target's Sales in Weak Economy
2.2 Target expands its profit potential as it enters international markets
2.3 Launch of New REDcard Program Increases Sales Amid Decreases in Credit Card Defaults
2.4 Increases in Commodity Prices Will Raise Clothing Retailer Prices
3 Competitors
4 References
The 2007 Credit Crunch and U.S. recession have affected Target in two ways: first uncertainty about job security and decreasing income brought about by the recession have made customers more reluctant to spend money on items that they do not need. Therefore, clothing and accessories have taken a back burner to necessities such as food and gas. With the revenue increase from the 2009 FY, gross margin increased 0.7% to 30.5%.[1] In addition, the credit crunch has caused alternative sources of income, such as home equity, to dry up, leading to an increase in credit card charges and also a rise in delinquencies(what occurs when a person fails to pay their debt within a certain amount of time). Since Target issues lines of credit to its consumers, it is exposed to the risk of delinquent payments.[3]
However, its credit card programs have improved, with its bad debt expense decreasing 5.3% and its amount of late fees charged to customers decreasing 24% from 2008.[4] The launch of the new REDcards program for Target's credit card in June 2010 offered 5% off at check-out for every purchase made with a REDcard and a 10% discount for every 10 prescriptions filled at a Target pharmacy with a REdcard. This program is aimed at existing Target shoppers, with the hopes that they will spend more at Target. This has reaped rewards such as improved consumer traffic in stores and a 5.5% increase in comparable store sales in November 2010.[5][6] November 2010 net sales were $6.01 billion, which was an increase of 6.7% from the same period a year ago.[7]
In order to improve its sales, TGT has also improved its stores with more space, expanded offerings, and a new design to make its products and stores seem more upscale. TGT aims to improve sales at each remodeled store by as much as 10% and on average, these stores have already exhibited 6-7% increases in sales. 400 stores are set to be made over before the end of the year and another 400 will be converted in 2011 out of TGT’s 1750 stores.[8]
Fiscal Year 2009 (Ended January 30, 2010)
For the fiscal year, Target had mixed results across the four quarters. Compared to fiscal 2008, the retailer had sluggish performance in the first two quarters, followed by strong results in Q3 and Q4. In particular, Target had a strong Holiday Season, where it had a 54% increase in net income compared to the Holiday Season in fiscal 2008.[9] Quarterly highlights are found below.
In Q1 fiscal 2009, TGT posted net income of $522 million, a 13.2% decrease from the Q1 fiscal 2008 amount of $602 million. [10] In Q2 fiscal 2009, Target reported net income of $594 million, a $40 million decrease from earnings of $634 million during Q2 fiscal 2008.[11] Q3 fiscal 2009 was more profitable for Target, as the retailer reported net income of $436 million, compared to $369 million in Q3 fiscal 2008.[12] In addition, Target's EPS increased 18.6% to $0.58 from Q3 fiscal 2009,[12] showing strength going into the Holiday season. Q4 EPS increase 53.3% to $1.24 compared to Q3 2008 [9] Net sales were $19.7 billion, a 3.7% increase over the same period last year [9] Net income was $936 million, up from $609 million in Q4 2008 [9]
Year Operating Revenue (millions) Operating Profit (millions) Operating Margin Net Income (millions) Net Profit Margin Same Store Sales Change
2009 $65,357 $4,673 7.1% $2,488 3.8% (2.5%)
2008 $64,948 $4,402 6.8% $2,214 3.4% (2.9%)
2007 $63,367 $5,272 8.3% $2,849 4.5% 3.0% [13] [14]
Q1 FY 2010 (Ended May 1st, 2010)
Target reported net sales of $15.158 billion -- a 5.5% increase from Q1 fiscal 2009.[15] Revenue from Target's REDcards business totaled $435 million -- a 7.9% decrease compared to Q1 fiscal 2009.[15]
The net sales increase was driven by comparable store sales growth of 2.8%.[15]
Target posted net income of $671 million -- a 28.6% increase compared to Q1 fiscal 2009.[15]
The strong net gain was reflected in Target's EPS of $0.90 for the quarter -- a 30% increase compared to Q1 fiscal 2009, and the highest quarterly EPS in the retailer's history (excluding holiday-driven Q4 results).[15]
Q2 FY 2010 (Ended August 1, 2010)
Sales increased 3.8% in the second quarter to $15.1 billion in 2010 from $14.6 billion in 2009, due to the contribution from new stores combined with a 1.7% increase in comparable-store sales.
Net income was $679 million compared with $594 million in Q2 in 2009.
EPS increased 17% to 92 cents from 79 cents in the same period a year ago.
EBITDA and EBIT margin rates were 10.5 percent and 7.2%, respectively, compared with 10.6% and 7.3% in 2009. [16]
Q3 FY 2010 (Ended November 1, 2010)
TGT reported that its third quarter earnings increased by 22.7% to $535 million. Revenue rose 2.2% to $15.61 billion.[17]
The firm posted EPS of 74 cents per share, which beat Wall Street earnings estimates of 68 cents per share.[17]
Sales increased 3% to $15.2 billion compared to the same period from a year ago. Comparable store sales increased 1.6%. This is largely due to contribution from new stores and an increase of 3.2% in retail segment earnings
Third quarter gross margin was 30.6%, which is down from 30.8% from a year ago.[18]
Business Segments
Retail (97% of Fiscal 2009 Revenue)
The retail segment concerns all merchandise and food operations in Target stores as well as the company website. The retail segment itself is made up of different product categories:
Target maintained well-balanced product sales in fiscal 2009.[19]
Household Essentials -Target sells various household items in this business, ranging from pharmaceuticals and beauty products to cleaning and paper products.[20]
Hardlines-Target sells a range of sporting goods and toys, including bikes, golf supplies, camping and outdoors equipment, and toys for children of all ages. In the entertainment section, Target sells a wide selection of music and movies. Target has also been increasing its stock of electronics. Target also participated in the launch of new video gaming systems by selling hardware (consoles), software (games), and accessories (controllers, memory cards). Target Corp. is well positioned for profitability and continued growth in the consumer electronics department.
Apparel & Accessories-Target stores sell a range of clothing, for men, women, and children, including casual, athletic, and business casual to semi-formal styles. In addition, Target.com sells formal apparel and evening wear. Target also sells shoes and a variety of accessories, from sunglasses to purses to jewelry and watches. GO International, Target's new design initiative, was launched in 2006. Featuring international designers for limited-edition collections, GO International is part of an effort to boost clothing sales and emphasize Target's reputation as affordably trendy and fashion-conscious. Its latest collaboration is "McQ," designed by Alexander McQueen
Home Furnishings & Decor-In the home decor and furnishings department, Target sells a selection of bedding, linens, and decorative home accents. Target also carries a stock of furniture, including chairs, tables, desks, and bookshelves. TGT introduced the Target Casual and Contemporary Home brands in 2006, and also reintroduced the Waverly brand. These Target-owned brands allow the company to keep prices low for customers, while still maintaining profitability for the store.
Food and Pet Suppiles-This segment includes Target's grocery store. It has taken more control over this segment by selling its own private-label brands such as Archer Farms, Sutton and Dodge and Market Pantry.
Credit Cards (REDcards) (3% of Fiscal 2009 Revenue)
Target earns revenue on its credit cards primarily from finance charges and late fees charged to customers. Target also receives revenue in the form of fees from merchants who accept the Target Visa credit card. Net credit card revenues were $1.92 billion in FY09, down from $2.06 billion in FY2008.[1]
Expenses that Target Corp. incurs by offering credit card services include a provision for bad debt (outstanding balances that can no longer be collected, for example, those from customers who declare bankruptcy). Other expenses include marketing and operating costs associated with promoting and maintaining the Target brand credit card, and the cost of reward programs and new account discounts.
Revenue from finance charges was $1,450 million in 2009, compared to $1,451 million in 2008. Late fees decreased from to $461 million from $349 million, in addition to bad debt expense, which more than doubled in FY2008, decreased to $1.19 billion, down from $2.06 billion in 2008.[1]
On May 19th, 2008 Target sold a 47% stake in its credit card receivables to J P Morgan Chase (JPM) for $3.6 billion dollars cash. Target was previously one of the last big box or department store to maintain a 100% stake in their credit card receivables[21]
Trends and Forces
High Customer Satisfaction Bolsters Target's Sales in Weak Economy
With the recession that hit the American economy in 2008 and 2009, consumers throughout the U.S. are tightening their purse strings and cutting down on non-discretionary goods. Target's customers are still shopping but they are buying fewer products each time. However, there is a silver lining: satisfaction among Target shoppers tends to be the highest in the country, and 50% of customers rate Target as their favorite place to shop.[22] Once consumers gain more confidence in the economy, Target may be where they return to shop because of their positive shopping experience. According to the American Customer Satisfaction Index's (ACSI) Fall 2010 study, Target scored an 82 in customer satisfaction compared to a 71 for Wal-Mart Stores. [23] The Target consumer also tends to be more affluent than the average American and thus has more money to spend. In 2010, Target is focusing more on store renovations and enhance store sales productivity, including introducing smaller format stores. [22]
Year 2009 2008 2007 2006
Comparable Store Sales -2.5% -2.9% 3.0% 4.8%
Number of transactions -0.2% -3.1% 0.3% 1.1%
Average transaction amount -2.3% 0.2% 2.6% 3.7%
Units per transaction -1.5% -2.1% 1.1% 2.2%
Selling price per unit -0.8% 2.3% 1.5% 1.4%
[24] [25]
Target expands its profit potential as it enters international markets
In its first expansion outside of the US, Target bought leases for 220 Zellers stores, one of Canada’s largest mass-merchandise retailers, in Canada for $1.825 billion.[26] Target plans to open 100 to 150 stores by 2013 and 2014 and the remaining stores will be taken up by Target or converted by other brands. [27] As the US market becomes increasingly saturated by retail giants, such as Walmart, companies are beginning to establish a presence overseas in order to seize market share in other countries Wal-Mart, for example, has over 4,000 stores in Central and South America, Mexico, Canada, Japan, China, and the United Kingdom. International sales contributed 25% to Wal-Mart's 2009 sales. [28] With these plans for international expansion, Target is now positioned to compete with Walmart with revenue from international sales. Target has also considered opening stores in Mexico and Latin America in the next 3-5 years.[29]
Launch of New REDcard Program Increases Sales Amid Decreases in Credit Card Defaults
Target extends a line of credit to its customers through its REDcards program. In June 2010, Target announced a new program that offered 5% discounts for every purchase made with a REDcard and a 10% discount for every 10 prescriptions filled at a Target pharmacy with a REDcard. This program is meant to encourage existing Target consumers to spend more, especially during the holiday season, as discretionary spending eases up. Target's sales have increased since the launch of the program, especially with a 5.5% increase in comparable store sales in November 2010. This is significantly higher than the 1.6% comparable store sales growth of the Q3 2010.[5] The program is expected to add about 1% to comparable store sales in Q4 2010 and 1-2% in comparable store sales for 2011.[30]
The 2008 financial crisis left many consumers with less disposable income, leading to the inclination to charge their purchases instead of paying cash. However, a 2009 upturn led to a 5.3% decrease in TGT's bad debt expense and a 24% decrease in its amount of credit card late fees from 2008. As a result, with more incentives for consumers to buy goods in Target's stores, TGT's sales can benefit, as long as there are not a large amount of defaults.[4] This program will also help reduce the general perception that Target's products are more expensive than Wal-Mart's by coming close to matching Wal-Mart's prices. The program is also beneficial in identifying and analyzing customer demographics to allow for more effective marketing.[30]
Increases in Commodity Prices Will Raise Clothing Retailer Prices
In 2010, cotton consumption exceeded cotton production for the fifth year in the row, making cotton prices increase by 80.5% from last year.[31] [32] In 2009, natural disasters also severely damaged crops in many large cotton producer countries, such as China, India, and Pakistan. This led to decreases in cotton exports from these countries and increases in cotton imports as these countries sought to supplement their supply of cotton. [33][34] With limited cotton supplies and rising prices, retailers will either have to absorb these higher material costs, restructure the composition of their clothing to have less cotton, or pass these higher costs to its consumers. Higher clothing prices or lower quality clothing could discourage consumer spending, resulting in decreased net sales. However, adult or teen clothing retailers may not be too adversely affected as their clothing (which is usually 30-40% cotton based) has more flexibility in their composition and thus, costs.
In addition, raising commodity prices in other areas will also raise costs for retailers. The price of shipping a 40-foot dry container from China to the US has increased by 90% since 2009. Lumber and coal prices increased 36.3% and 23.7% from last year, respectively, while oil prices increased by 40% in early 2010 but has now decreased back to a steady single digit increase for the year.[31] While premium price and established brands may be able to pass their higher costs to their consumers, value based companies may not fare as well and may suffer from lower profit margins.[31]
Competitors
Wal-Mart Stores (WMT) is Target's main competitor. The average Wal-Mart customer's income is below the national average whereas the average Target customer's income is above the national average. Target's reputation as "cheap chic" has boosted its cache with relatively affluent "selective" shoppers who purchase consumable household goods at Wal-Mart due to low prices but are not interested in Wal-Mart's apparel or home accessories offerings. These customers frequent Target for their more trendy home furnishings and clothing selection. Target also follows the example of H&M and collaborates with high-profile designers who would normally be outside the price range of their average consumer, such as Alexander McQueen and Thakoon. Target has been competing with Wal-Mart on price, notably matching Wal-Mart's generic drug prices. By keeping its prices low, and extremely close to Wal-Mart's, Target is challenging Wal-Mart's position as the price leader in the discount retail market. However, Wal-Mart currently continues to dominate the market, and WMT's actions greatly influence the entire industry.
Target v. Wal-Mart (US), 2009
Target Wal-Mart
Total Sales (millions) $63,435 $404,046
Growth from 2008 0.9% 1.0%
Same Store Sales Increase -2.5% -0.8%
Sales per Store (mm) $36.4 $48.0
Sales per Square Foot (thousands) $274 $424
[35] [36]
Target also competes with Costco Wholesale (COST), currently the largest membership warehouse retailer. Target and Costco share a similar customer base: the average household income for Costco's customers is above $75,000, compared to Target's $70,000.[37] This means Costco competes more directly with Target in terms of consumer base than does Wal-Mart. Costco sells a range of grocery items, electronics, household items, and clothing that rivals Target in product diversity; however, Costco sells products in bulk, whereas Target focuses on individual items and smaller packages. Costco's strategy of buying large quantities of a product when it is cheap makes it a formidable competitor as it is able to keep its product costs down amidst rising prices.[37][38]
Target v. Costco Wholesale (COST)
Target Costco
Net Income ($B, 2009)[39][40] 2.49 1.09
Number of U.S. Stores 1,740 566
Net Income Growth from 2008 12.4% -14.8%
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