By Neil Saunders
Target heads into the holidays in extremely good shape. These results are a testament to that fact. The 5.7% uplift in total sales is slightly softer than last quarter, but it is still a market-beating number and shows that Target is gaining share across many categories.
Target’s ongoing store refresh program is raising the bar and improving conversion rates.
Target is managing to drive sales growth through stores and online and is using both sides of the business to create a seamless omnichannel proposition. The 50.6% rise in online revenue is particularly impressive and justifies the various investments Target has made in its online services, including delivery options. From our data, overall satisfaction among Target’s online shoppers has risen by 7.4 percentage points over the past year.
Refresh program improves conversion
One issue faced by many retailers is the cannibalization of store sales from the rise of online. However, Target is not suffering from this to any significant degree. Indeed, store sales rose by a respectable 3.7% over last year. Most of this is thanks to Target’s ongoing store refresh program, which is raising the bar in terms of experience in its shops and improving conversion rates across key categories like apparel and beauty. The customer satisfaction stories are telling, and there has been a significant uplift in refurbished shops. As the new format is rolled out to more stores over the next year, it should provide some uplift to store sales growth, which will be useful as Target starts to lap tougher comparatives.
While investment in the selling channels is important, so too is the enhancement of what is sold in them. On this front, Target’s new brands have been well received by consumers and have provided a sustainable point of differentiation from rivals in categories like clothing, homewares, and household goods. We are particularly impressed by the steps taken in apparel, which have widened the audience and have attracted an increasing number of younger shoppers.
Grocery needs more destination appeal
As much as Target is on a roll, we have two minor concerns. The first is with grocery and the second is with underlying profitability.
On the surface, Target’s profits look good: this quarter, net income rose by a solid 30.2%. However, all of this is due to a much lower net income expense and a lower income tax provision. The gains have not come from an increase in operating profitability. Indeed, operating profit is down by 3.3% over the prior year. This modest decline reflects pressures including higher staff wages, fulfillment expense, some investment costs, and a slight decline in gross margins. While this is unfortunate, this decline is necessary to support Target’s growth ambitions. Some on Wall Street may lament the dip, but the truth is you cannot reinvent a retailer on the cheap. Target is not doing that and we applaud them for it.
In terms of grocery, while we are satisfied with the progress Target has made in refreshing its food department, we do not believe its ambition in non-food is reflected in its food offer. Much more effort is needed in developing new ranges, especially in prepared foods, and in creating more of a destination appeal to its grocery department. At the moment, Target’s food offer is OK. But it needs to be better than OK if it is to generate superior growth.
Despite these two niggles, we remain impressed with Target’s progress. It is transforming itself into a modern retailer that is relevant to consumers and their needs.
Neil Saunders is managing director of research firm GlobalData Retail.