Target Corporation

Company History

• Target Corporation is an American retail corporation that operates a chain of discount department stores and hypermarkets, headquartered in Minneapolis, Minnesota. It is the seventh-largest retailer in the United States, only behind Walmart, Amazon, Costco, Kroger, Home Depot and CVS.

• Target is viewed as a bell weather and recession proof retailer due to its uniqueness:

  • A broad selections of goods: home goods, Electronics, Apparel, F&B, Beauty, etc.

Comparables

Valuation vs Historical average: (BF is blended forecast, LF is last filing)

Comp VS peers:

WMT VS TGT Stock performance

Depressed Valuation

Margin and comp sales

Target sell side estimation

WMT sell side estimation

Highlights on financial

Income breakdown

What to focus

Alternative Revenue

• Target Circle 360 Target Circle 360

  • launched in April 2024, and is an expanded version of the Target Circle Loyalty program. The loyalty program has over 100 million members who have earned over 2 billion in rewards. The program has three tiers: 1) Target Circle: free to join membership with personalized deals, member-exclusive sales, and automatic deals at checkout; 2) Target Circle Card: credit card that provides an extra 5% discount on purchases every day, extra time for returns, and free two day shipping; 3) Target Circle 360: paid membership that has unlimited free same day delivery for orders >35, access to Shipt marketplace, along with the other same benefits Target Circle and Target Circle Card provides. The pricing options for the Target Circle 360 membership are 99/year, 10.99/month, 4.99/month if you are a student, or 49/year if you have a Target Circle card.

  • Size and profitability

  Since their expansion of Target Circle, TGT has rapidly increased their loyalty program membership, noting that they added 2 million new members in 2Q and 3 million in 3Q. Within these new members, they have added hundreds of thousands of Target Circle cardholders and Target Circle 360 members. In 2Q, they also noted that Target Circle 360 grew in the low teens, and that the Target Circle membership enables them to give customers four times more personalized offerings compared to a year ago. In their recent holiday update, TGT also noted that during November and December combined, same-day delivery grew more than 30%, mainly being driven by Target Circle 360.

Roundel

• Created in 2016, Roundel is TGT's retail media business that uses TGT's customer insights to create personalized advertising campaigns for brands. Roundel works with over 2000 vendors, 150 premium publishers and channels (ex: Pinterest, NBC), and has done partnerships with a wide variety of brands (ex: Apple, Pepsico, etc.). Their methods of advertisement include ads on Target.com / TGT app, ads on the connected TV, co-branded content with TGT's influencer network, social media, and more.

• Size and profitability

  • TGT has mentioned in many quarters that Roundel is the company's fastest growing segment in the revenue line. Roundel has grown over 60% the past two years, is on their way to deliver 2 billion in 2024, and delivered mid teen growth in 3Q - serving as a benefit to TGT's revenue and gross margin rate. Roundel has also published on its website that their multi-channel guests spend 9x more than online-only shoppers.

  A notable segment of Roundel that will drive profitability is TGT's strategy towards off-site advertisements. TGT noted that ~30% of Roundel's revenue is generated outside of their owned digital properties (such as social media and streaming platforms), which drove more than 250 million visits to TGT's properties in 2023. In a recent NRF conference, management noted that this percentage is higher than the off-site industry average of 21%. Off-site advertisements are a rapidly growing segment, as NRF also mentioned that off-site spending has increased +40% y/y and is projected to grow from 13 billion to more than 25 billion by 2028.

  • Many data publications have also forecasted that the retail media industry will rapidly grow in the next few years. This month, Nielson published a report stating that worldwide retail media ad spending is projected to increase by nearly 100 billion between 2020 and 2025, +21.8% this year, and that 68% of global marketers believe that retail media is more important to their media strategies than a year ago. Another data firm, Emarketer, also noted that retail media search ad growth is expected to accelerate while traditional search growth will decelerate: by 2028, they project retail media search ad spend to increase by +23.4% (vs. +18.6% in 2024), while traditional ad spend will only increase by +0.9% (vs. 8.6% in 2024). Many are optimistic about the future of retail media networks, as they serve as a key strategy for small and mid-size retailer growth, and create strong inter-connectivity with consumers.

Potential accretive EBIT

Target+

• Target+ launched in 2019 and is an invite-only, third party marketplace that enables third party retailers to sell at TGT. The marketplace aims to help brands reach millions of new customers and features a thoughtfully selected assortment of trending, premium, quality products. As of June 2024, Target+ features more than 2 million products from brands such as Crocs and Timberland, and has more than 1,200 partners.

• Size and profitability

  • Recently, in their 2023 Financial Community meeting, management noted that they expect Roundel and Target+ to make a meaningful contribution to revenue the next 10 years - they estimate revenue growing at an average of ~4% per year the next decade. In 1Q, they also mentioned that Target+ will significantly grow in future quarters, and that they have doubled the number of partners and products in the past year.

  • Looking at the impact of 3P on sales for WMT as an example, the take rate is included in net sales and is part of SSS, while the value of the sale is not fully realized in net sales (this would be in GMV).

Summary

• Solid balance sheet, most stores and land are owned by Target vs other retailers

Steady business with multiple levers to increase margin, need to execute

China tariff is a potential risk given high percentage of goods imported from China, although the weights have been coming down 2018

Valuation is at almost historical low, good dividend ratio(3.64%) and revenue growth is expected to come back in 2026

• Company still loses shares in high income cohort, price is high compared to WMT (WMT is 11% on average cheaper)

• 2024 holidays sales saw comp sales up vs flat, however, consumer sentiment is coming down and consumers are fatigue

• Need to watch couple things below to see inflection point:

  • Consumer sentiment recover and inflation expectation coming down

  Sales growth and margin

  • Additional company disclosure for their alternative revenue sources