Remerchandising Will Draw Younger, Affluent Shoppers In The Future

Key Takeaways

• Tanger's remerchandising and higher occupancy aim to attract affluent demographics, drive foot traffic, and improve revenue and net margins.
  
• Solid financial footing and strategic growth initiatives position Tanger for future revenue enhancement and earnings growth.
  
• Competitive pressures and external market risks may hinder growth, despite previous success in retenanting and a strong balance sheet.

Catalysts

Tanger Inc. (NYSE: SKT) is a leading owner and operator of outlet and open-air retail shopping destinations, with over 43 years of expertise in the retail and outlet shopping industries.

• Tanger is actively remerchandising its centers to attract younger, more affluent demographics by signing new leases with aspirational brands and diversifying its tenant mix, expected to drive higher foot traffic and boost revenue.
  
• The company is experiencing positive momentum from higher rental revenues and sustained demand, as evidenced by its 11 consecutive quarters of positive rent spreads and increased guidance for same-center NOI growth, indicating a potential increase in earnings and net margins.
  
• Tanger's robust leasing activity, with a 97.4% occupancy rate, and ongoing efforts to replace less productive stores with more successful ones are anticipated to maintain revenue growth and improve net margins.
  
• With low leverage, a largely fixed-rate balance sheet, and free cash flow after dividends, Tanger is well-positioned to pursue strategic growth opportunities and acquisitions, which could enhance future revenue and earnings.
  
• Initiatives in enhancing the shopper experience through targeted digital marketing and community engagement are set to strengthen customer loyalty and potentially uplift sales and net margins.

Tanger Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tanger's revenue will grow by 1.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.1% today to 19.2% in 3 years time.
• Analysts expect earnings to reach $104.3 million (and earnings per share of $1.02) by about December 2027, up from $94.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $117.1 million in earnings, and the most bearish expecting $71.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 46.1x on those 2027 earnings, up from 41.3x today. This future PE is greater than the current PE for the US Retail REITs industry at 35.8x.
• Analysts expect the number of shares outstanding to decline by 3.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.43%, as per the Simply Wall St company report.

Tanger Future Earnings Per Share Growth

Risks

• The potential impact of tariffs and lower U.S. consumption could pose risks to future revenue as these factors could reduce consumer spending and retailer profitability.
  
• While successful in past retenanting, there is a risk that new aspirational brands might not achieve the expected sales performance, potentially impacting rental growth and same-center NOI.
  
• Frictional vacancies from transitioning to new tenants could lead to temporary dips in occupancy rates and revenue, affecting net margins.
  
• Fluctuations in expense recoveries due to operational considerations may impact net operating income if not adequately managed.
  
• Despite a strong balance sheet, there is ongoing competitive pressure in the acquisition market, which might affect the ability to grow earnings through external acquisitions if opportunities are not captured effectively.

Valuation

• The analysts have a consensus price target of $38.0 for Tanger based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $543.3 million, earnings will come to $104.3 million, and it would be trading on a PE ratio of 46.1x, assuming you use a discount rate of 7.4%.
• Given the current share price of $35.41, the analyst's price target of $38.0 is 6.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.