Target Corporation (Target) is a general merchandise retailer selling products through its stores and digital channels. The Company sells an assortment of general merchandise and food. The Company’s product category includes apparel and accessories, beauty and household essentials, food and beverage, hardlines, and home furnishing and decor. Its general merchandise stores offer an edited food assortment, including perishables, dry grocery, dairy and frozen items. The Company has stores of approximately 170,000 square feet offer a full line of food items comparable to traditional supermarkets.
Investment Overview
Omni-channel growth. To cope with rising market competition, Target continues to focus on its omni-channel model that integrates both online and offline sales, supported by its ongoing efforts in same-day delivery services to cover 80%+ of the US population. It also provides contactless pickup services - Drive Up. Meanwhile, more investments on store remodelling and front-end optimisation are being carried out to attract more customer traffic. Target is also expanding its partnership with well-known brands, such as Apple and Disney, to drive online and in-store sales. As such, Target's omni-channel model could help to cater for different customer needs and support in-store and online sales growth in the long term.
Higher delivery efficiency. Riding on its well-established network of physical stores as logistics fulfilment centres, which are in close proximity to customers. Target has achieved a delivery cost that is significantly lower than the traditional delivery model. For example, Target's delivery costs, compared to traditional means, could be 40% lower with digital fulfillment and even 90% lower with same-day offerings such as Order Pickup and Drive Up. Lowered delivery service expenses could also help Target to alleviate any potential margin pressure.
Track record and outlook. Target demonstrated good track record with revenue CAGR of 8.5% over the past five years while earnings CAGR of 4% was dragged down by the earnings contraction in FY23. Recent challenges such as inflationary pressure and slower move of inventory given the economic pressure, could have certain impacts on Target’s margins. Yet, we remain positive on its future earnings growth in view of its strong customer loyalty and ongoing operating efficiency improvements.
Key risks:
Rising competition; prolonged geopolitical uncertainties; high inflation; slowdown in e-commerce growth; significant increase in capex to support e-commerce and technologies growth; etc.
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