We review Target’s first quarter performance as it continues to build sales momentum and invest in its digital capabilities.

Target’s key numbers

Target’s first quarter sales increased 5.1% to $17.4bn, with comp store sales up 4.8%. Comparable digital sales increased 42%, contributing 2.1 percentage points to the overall comp sales growth. Operating income increased 9.0% to $1.1bn. These results represent another strong quarter from the business, reflecting its multi-year investments in store remodels, new formats, range development and digital fulfillment. Food and beverage comps were up around 3%.

Over 80% of digital volume fulfilled by store-level inventory

Target’s digital investments have been transformational for the business. During Q1, more than 80% of its digital volume was fulfilled by store level inventory. Over the last three years, the retailer has added ship-from-store capabilities to almost all its stores, significantly changing its stores operation and its financial model. This enables it to offer one of the most comprehensive fulfillment models in the US, including same-day, next-day and two-day delivery, along with store pickup. Target remains confident that its stores-based model will remain feasible as its digital volumes continue to grow.

Growing its most profitable digital fulfillment models

Shipt dame-day delivery, order pickup and its drive-up services are its fastest growing, which are also Target’s most profitable fulfilment models. As it moves digital fulfillment from its distribution centres to stores, costs are reduced by around 40%. For some of its same-day fulfillment models, the cost reduction is around 90%.

Source: IGD Research

Monitoring impact of tariffs

With tariffs front of mind for all US retailers, Target continues to monitor the impact of trade negotiations. Contingency plans are being developed to help mitigate the impact on shoppers and the wider business. Last year’s tariffs had minimal impact, supported in part by Target’s multi-category model and diversified manufacturing base.

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Target has introduced a new sustainability-led range of household essentials. The Everspring private brand range, consisting of around 70 products, is being launched in conjunction with Earth Day.

Retailers focusing on the environmental sustainability agenda

The launch of the brand aligns with one of our key trends for the year, ‘Doing good is good business’. We expect retailers and brands to further differentiate their offers and set higher standards on a range of sustainability-based topics. We have seen several retailers act to reduce the use of plastics, while earlier this year, Albertsons expanded its Open Nature private brand as part of its Earth Month activities. This features a range of products with environmentally friendly attributes.

Aligned with new Target Clean programme

The range includes laundry detergent, dish soap, paper towels, essential oils, candles and hand soap. The products are Target Clean compliant, the retailer’s standard for products that are formulated without specific chemicals and feature bio-based or recycled materials or natural fibres. Earlier this year, the retailer introduced the Target Clean icon on products across household essentials, beauty, personal care and beauty categories.

Source: Target

Style credentials to life through product packaging

The packaging features easy-to-understand ingredient lists and graphic icons on the front of each product. The majority of the packaging’s bottles are made up of 50% or more recycled content, including post-consumer plastic. As with last year’s launch of the Smartly range of everyday household and personal care products, the retailer has aimed to bring its style credentials to life with Everspring.

Overhauled private label programme

Private label development remains a priority for Target. Over the last two years, it’s introduced over 15 new private brands. Most of the new ranges have been focused on clothing and homewares, although last year it moved into the electronics space with the launch of the Heyday brand. Target has also introduced several digitally-native brands into its stores as part of its goal to create a more relevant and differentiated offer.

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We review Target’s fourth quarter performance and how its focus on creating an omnichannel strategy, optimising its stores for ecommerce fulfillment, is underpinning sales growth and cost reduction.

Winning in stores and online

Target delivered a strong finish to the year with comparable sales up 5.3%, and comparable store sales up 2.9%. This reflects the continued strong growth of its digital business, with sales up 31%. The retailer also benefitted from its strongest store traffic for over 10 years, providing a solid foundation for the business in the new financial year. Overall, total revenue of $23.0bn was flat to last year. For the full year, total revenue was up 3.6% to $75.4bn, with net earnings up 0.8% to $2.9bn.

Investment plan delivering for the business

These results reflect the progress that’s been made in transforming Target over the last two years as it has set out to become “America’s easiest place to shop.” In 2017 it put in place a major investment programme to reimagine its stores, re-engineer its supply chain, build new ecommerce fulfillment capabilities and develop a suite of new private brands. The retailer has thrived as many of its peer group have faced trading challenges, with many closing stores or exiting the market completely. Commenting on its relative performance, president and CEO, Brian Cornell, stated,

”As a shakeout in our industry continues, the separation between those who can afford to invest, and those who can't is real.”

Source: IGD Research

Expanding its smaller format store network

Having accelerated its progress last year, in 2019 the retailer will focus on driving adoption and scaling its initiatives. Having remodelled 400 stores in the last two years, it will undertake 300 this year, along with an additional 300 in 2020. While it has pulled back opening any larger format stores, it continues to see solid results with its smaller formats. With almost 100 in the network, it will add 20-25 new stores each year, focused on urban locations and college campuses. The expansion of this format, which is enabling it to enter new communities, forms part of its planned $3.5bn capital expenditure.

Scaling up its digital fulfillment options

Digital sales have grown to more than $5bn annually as it has built an omnichannel strategy, optimising its store network. The business has rolled-out the Shipt same-day delivery service to almost 1,500 stores and expanded Drive Up to 1,000 stores. Last year, almost 2m store pickup deliveries were undertaken, with most meeting its two-minute target. The Shipt programme will be expanded to include some general merchandise categories this year as it continues to develop its range of fulfillment options.

Equipping the supply chain with new capabilities

Developing its stores as fulfillment centres has been at the heart of this strategy, enabling it to ship orders faster, and at lower cost, than through an upstream fulfillment centre. Combined with technology, automation and process efficiencies, Target has lowered its average cost of fulfillment by 20%. During the fourth quarter, 75% of all online orders were fulfilled by it stores. This would not have been achieved without the re-engineering of its supply chain which enables to retailer to send stores exactly the product required in pallets, cases or single units. These capabilities will be extended across its supply chain network over time, although this work is unlikely to start until 2020.

New private brands and partnership

Having introduced 20 new private brands over the last two years, Target continues to see white spaces and opportunities to build brands to attract new customer groups. Kids and babies will be a major focus this year as it aims to capitalise on the exit of Toys R Us. It will also launch new brands and design partnerships and develop best-in-class brand management expertise across the business.

A new vision for food and grocery

Grocery continues to be a work-in-progress, although there is growing momentum in this business. Recently it appointed Stephanie Lundquist to lead this business and expects to make faster progress over the next few years. The business has been restructured to include buying, operations, and supply chain, enabling Target to build a more robust and cohesive business.

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