A Strategy For Growth And Community Engagement

Key Takeaways

• Elevating retail mix and community experiences attract a wider consumer base, positively impacting revenue growth through increased engagement.
  
• Proactive tenant management and strategic occupancy optimization drive higher revenue and net operating income by ensuring quality and diversity in retailer mix.
  
• Dependency on strong retailer demand and innovative strategies may face hurdles from shifting consumer preferences and tenant financial instability, impacting revenue and NOI.

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.

• Elevating the retail mix and creating a community experience to drive traffic and increase engagement impacts future revenue growth by attracting a wider and more engaged consumer base.
  
• Executing 2 million square feet of leases over the trailing 12 months at an average spread of 15% demonstrates strong demand for space, which is expected to drive future revenue through increased base rents.
  
• The company's focus on optimizing the merchandising mix, whether through renewals or retenanting, suggests a strategic approach to occupancy and tenant quality that can lead to higher revenue and net operating income (NOI) growth.
  
• Introduction of new-to-portfolio brands and execution of leases for high-demand tenants like Sephora indicates a strategy to enhance and diversify the retailer mix, potentially increasing sales per square foot and attracting more traffic.
  
• The proactive management of tenant relationships and quick retenanting of space, as demonstrated by the rapid resolution with rue21 and Express bankruptcy proceedings, minimizes the potential negative impact on revenue, ensuring continued growth in net margins and earnings.

Assumptions

• Analysts are assuming Tanger's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 19.2% today to 18.0% in 3 years time.
• Analysts expect earnings to reach $97.0 million (and earnings per share of $0.98) by about September 2027, down from $97.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $120.2 million in earnings, and the most bearish expecting $67.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 51.3x on those 2027 earnings, up from 35.0x today. This future PE is greater than the current PE for the US Retail REITs industry at 34.5x.
• Analysts expect the number of shares outstanding to grow by 3.77% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.97%, as per the Simply Wall St company report.

Risks

• The company's reliance on the continued strong retailer demand and robust leasing activity for revenue growth could be impacted by changes in retail industry dynamics, affecting its ability to sustain increased base rents and, therefore, its revenue.
  
• A strategy focused on optimizing the merchandising mix and retenanting could face challenges if anticipated high-paying tenants do not materialize or if consumer preferences shift away from the outlets, potentially affecting net margins.
  
• The emphasis on creating a community experience and driving traffic may not yield expected engagement levels, especially if consumer spending patterns shift due to economic downturns, affecting earnings.
  
• The potential risks associated with the execution of peripheral land development projects and the assumption of these projects drawing additional traffic could fall short, impacting expected revenue growth.
  
• The impact of the rue21 and Express bankruptcy proceedings, despite positive management action, highlights the vulnerability to tenant financial instability, which could affect rental income and net operating income (NOI) growth if more tenants face financial difficulties.

Valuation

• The analysts have a consensus price target of $31.14 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 $539.1 million, earnings will come to $97.0 million, and it would be trading on a PE ratio of 51.3x, assuming you use a discount rate of 8.0%.
• Given the current share price of $31.24, the analyst's price target of $31.14 is 0.3% lower. 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.