Market Overview

How Target can Profit from Higher Employment


Economists were hoping for good employment data, which they got in abundance today when the Bureau of Labor Statistics announced that the nonfarm private sector added 243,000 jobs in January, ahead of most analyst estimates by nearly 100,000. The unemployment rate has fallen to 8.3%, and the economy has added jobs for three months in a row.

While the news has caused a widespread rally in American markets, some companies will benefit from stronger employment more than others. One such company may be Target (NYSE: TGT), who is well positioned to benefit from a growing American economy that may entice more shoppers to spend more cash.

There are a few reasons behind this. Firstly, many shoppers moved away from Target in favor of Wal-Mart (NYSE: WMT) and Costco (NASDAQ: COST) during the downturn, causing revenues for the budget big-box retailers to climb, and stock prices to climb along with them. Shares in Wal-Mart jumped nearly 11% in 2011 and Costco rose over 15% while Target fell fell 14.8%, as the budgeting unemployed looked for ways to make their dwindling dollars stretch. Rising commodity prices and rising food prices shepherded consumers even further toward thriftier options.

Austerity has become a cliché for families and governments as everyone is looking to contain costs. This has become a way of life for Americans for nearly half a decade, and patience is wearing thin. The need to splurge has prompted consumers to spring for reported a 5.1% increase in net retail sales for January 2012, with $4.6 billion in sales eclipsing the $4.38 billion sales figure of January 2011. That compares to just a 1.4% increase in December sales last year, which rose to $9.88 billion.

The stronger growth for January may also reflect the rally that U.S. stock markets have seen in the past month. At least for now, optimism seems to have taken hold of investors and consumers alike. More optimism, translated into consumer confidence, will help bring consumers into Target stores and increase sales.

We may also be seeing consumers spending on purchases that had been postponed. Target reported that shoes, health care products, and boys' and girls' clothing were the strongest performers, with electronics and books much weaker. This may indicate that people are buying the things they use the most more frequently in a move against protracted frugality, although big-ticket items are still not on the docket.

The fact that consumers are buying, but not spending too much, would explain the disappointing results in more expensive retailers, such as department stores with higher price tags than Target. Both Macy's (NYSE: M) and Dillard's (NYSE: DDS) reported sales below expectations for January, although both stocks are up in Friday trading thanks to the new employment figures. Such a response may be overly hasty, since the companies have not yet proven that they can translate that economic data into higher sales.

Target, on the other hand, has already done that, and it is benefitting from failures amongst the competition. The slow motion collapse of Sears and K-mart (NYSE: SHLD) may speed up if it cannot access credit, which is becoming a real possibility. Their looming store closings will free up market share for Target, which is still opening new stores.

Target will need to steer clear of extra competition from Costco and Wal-Mart. Shoppers who moved to the budget chains may find themselves more comfortable with the stores. Target will also neet to orient its offerings to customer tastes.

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