In middle of 2013, the share price of Target Corporation (TGT, Financial) took a dive following the massive financial data breach. But in the last one year, the stock has gained over 35% and is hovering around its all-time high levels. Unlike its competitor Costco Wholesale Corporation (COST, Financial) which is opening or planning to open more stores in many countries, Target is folding up its Canadian operations. And like another competitor Walmart Stores Inc. (WMT, Financial), it has recently raised the minimum wage for its employees. How do these, and other developments, affect the company and its stock?
A quick exit from Canada
After taking over store locations from Zellers in 2011, Target opened its first Canadian store in 2013 and announced in January 2015, less than two years later, that it is closing shop in the country due to financial unviability of its operations in Canada. To date, many of the 133 stores have already been closed, and the remaining are planned for closure before the summer is over. This has meant a straightforward one-time loss of over $5 billion for the company. This decision by CEO Brian Cornell, who came in after the 2013 fiasco, looks bad on the books at first glance but is actually a wise move when viewed from the market’s perspective. By taking all the loss in one hit instead of staggering it over time, he is making sure that it will not have any effect on the company in the future. This is good for market sentiment.
Hike in employee wages
Having come under sustained pressure from workers’ advocacy groups such as UltraViolet, Target was forced to follow in the footsteps of Walmart and revise its wage rate upwards to $9 per hour. While good for its employees, it will have a direct negative impact on the company’s top line which is already taking a hit from the shutdown of its Canadian operations.
Expansion plans
The company is planning to open smaller format stores inside cities, as opposed to the big box stores that are usually in the suburbs and on the fringes. Target Express, as the experimental store in Minneapolis is called, are to come up at convenient locations for city dwellers who don’t want to make the commute to a distant location for their shopping needs. These mini stores will also serve as pick-up points for purchases made online, and the company hopes that a customer coming to the store to make a pick up will also purchase something else while in the store. Nine such stores are expected to come up in various locations across the U.S. in 2015.
Other factors
In a sign of streamlining its management and cost-cutting, the company has announced it is eliminating 1,700 jobs in its Minneapolis HQ and in India. This, along with improvements in its supply chain, is expected to save the company more than $2 billion through the next two years. Target also plans to spend close to the same amount in capex over the same time, half of which is expected to be spent on technology and supply chain. The company is increasing its focus on its online presence in a big way and has halved its threshold for free shipping of goods ordered, undercutting its competitors to grab the attention of online shoppers.
Conclusion
Given a mix of positive and negative factors, it is best to wait out the volatility in the stock price before making a purchase. But even during the volatility, since the fundamentals seem to be strong and the company is moving in the right direction, the stock is recommended as a "buy" around $75 per share price levels.
