By Neil Saunders
Although Target’s numbers have softened since the last quarter, the company’s various initiatives are delivering growth.
A comparable sales uplift of 3% is very respectable and makes Target one of the clear winners across the first quarter. One of the most positive aspects of this growth is that it is driven by contributions from both digital and stores. This balance is hard to achieve because, as we have seen from other retailers, online often grows at the expense of stores.
This has not been the case at Target where stores contributed 1.9 percentage points of growth to the comparable number, making them the lead driver of Target’s success. This justifies Target’s decision to focus on and invest in stores – a step that was criticized by some when it was announced.
The store enhancement program is proceeding well. Refurbished outlets provided an elevated experience that is easier and more pleasant to shop. Displays are more compelling and inspirational which, in turn, drives purchasing. Our customer data show that customer satisfaction at refurbished and newer stores is running significantly higher than at older units. There is no doubt that investing in stores was an expensive decision, but we believe these numbers show it was the right move to make.
One of the most positive aspects of this growth is that it is driven by contributions from both digital and stores. This balance is hard to achieve because, as we have seen from other retailers, online often grows at the expense of stores.
Refurbished stores were not the only factor driving Target’s numbers—which is hardly surprising given that many outlets have yet to receive a makeover. There were a few other things that contributed to success during the quarter.
The first of these is the new ranges and brands, especially in apparel and home. Over the holiday period, the merchandising of these in shops was a bit scrappy. However, Target seemed to rectify this in the first quarter with much stronger execution and more own-brands creating a fairly cohesive offer. While there is much more work to do in both apparel and home, Target is now on the path to success. These results should give the company the confidence to invest more in own-label and the marketing and in-store fixtures and merchandise that support it.
One interesting thing we have found in our customer data is that the number of consumers who browse and buy clothing and home goods in Target stores has increased, especially among younger and family demographics. This means that impulse buying and cross-shopping apparel and home when visiting to purchase other things are both up. We believe these numbers will strengthen over time, especially in clothing which was modestly affected by a delayed start to spring.
A reasonable performance on food is another factor underpinning Target’s success. The focus on lower prices has been noticed by consumers and has translated into more footfall into stores. That said, we believe that Target needs to employ more of the thinking of other categories to its grocery offer. More own brand development activity, better displays and merchandising, and some in-store theater would not go amiss. The offer is better than it was, but it remains somewhat sterile and basic. In a more competitive grocery market, this isn’t acceptable.
The one downside to Target’s results is the bottom line. Although this looks healthy at net income level, most of this was driven by lower interest expenses and reduced tax provisions. At operating level, income fell by 9.9%, largely thanks to price cuts and investments which pushed up costs. This dynamic is not unreasonable, and we applaud Target for putting long-term success ahead of short-term gains. However, it does underline that continued effort is needed to drive top-line growth—especially as the company starts to lap tougher prior year comparatives.
Neil Saunders is managing director of GlobalData Retail.