By Neil Saunders
Target’s new fiscal year is off to a flying start with an extremely healthy increase of 5.1% in overall sales, supported by uplifts at both stores and online. On the bottom line, net income rose by 10.8%, partly reflecting the greater efficiency of Target’s range of digital fulfillment services. The results stand in direct contrast to those recently coming from the beleaguered department-store sector and demonstrate that success is there for the taking, so long as retailers are prepared to work for it.
One of the success stories at Target has been the revitalization of physical stores, many of which have been refurbished and are providing a much more pleasant and engaging shopping experience. This, along with improvements to the ranges put into stores—particularly in apparel and beauty, have made them more compelling destinations leading to an increase in shopper traffic. This dynamic is particularly favorable for Target as consumers in stores make lots of impulse buys, which helps drive sales.
Although stores refurbished over a year ago are still seeing healthy growth, there are further gains to be made as additional older-style shops are renewed and refreshed. On this basis we believe that the contribution to growth from stores will remain elevated for at least the next couple of years. Looking beyond this, we remain impressed by the various initiatives Target has in the pipeline to drive traffic to both stores and online—including its embryonic Target Circle loyalty scheme. Our research into this program, which remains limited to a select number of locations, is very positive and shows it is capable of producing an uplift in shopper frequency and spend. If it, or a variant of it, is rolled out nationally, we believe it will provide further buoyancy to growth.
Although stores have made a significant contribution, digital remains the star of the show with a 43.5% uplift in sales over the prior year. This is significantly above the overall market and indicates that Target is adding substantial market share both in the overall channel and across most online categories. New ranges, especially the brands that are exclusive to Target, have helped to drive sales online but the main thrust of growth has come from a more flexible approach to delivery and fulfilment.
The raft of same-day fulfilment options, which include pick-up from store and drive up to store, have proved to be extremely popular and are helping Target to increase customer numbers in the online channel. From our consumer research data, it is clear that customers value the convenience and speed that same day pickup offers and that many of them visiting stores go on to make further purchases while in the shop. As much as this model is advantageous for driving sales, it is also very positive for margins as store-based fulfilment is more profitable than delivery to home. This is one of the reasons Target has been able to engineer better bottom line numbers.
As much as how products are sold is important, what is sold is vital. On this front we remain extremely impressed with Target’s development of own-brands. The work on apparel has helped to renew the category and has increased shopper penetration in clothing. However, the development of new household labels—like the Ever Spring cleaning line—has created new points of interest and has captured some sales from mainstream national brands. This is good for differentiation, but it is also good from a margin perspective.
Target is firmly on the front foot. Provided the economy remains reasonable, it will continue to outperform.
Neil Saunders is managing director of GlobalData Retail.