Retail Champions 2020: Target

This is the fifth online installment of the HomeWorld Business 2020 Retail Champions, a special report from the May 18th print edition examining six retailers that will lead the post-COVID-19 retail recovery. View a digital version of the entire May 18 edition by clicking one of these links: Flipbook or PDF.

MINNEAPOLIS— Target has enjoyed success over the past couple of decades as it became a true national mid-market omnichannel retailer, and even if it has struggled at times through that period, the company may have gotten itself in just the right position to meet the challenges of the COVID-19 outbreak and post-pandemic environment.

Target troubles included a quickly abandoned initiative in Canada and a fresh food and grocery expansion that taxed its store model, which occasioned a change in management that brought former Sam’s Club runner Brian Cornell in as CEO. He quickly refocused the company’s approach to store-level merchandising and reconfigured the omnichannel element to leverage the store network with buy-online-pick-up-in store operations that included front-of-the-sales-floor desks for easy product retrieval. Target already had been developing formats for urban locations that, besides in-store sales, boosted its ability to entice city dwellers into purchasing online and picking up a range of online merchandise at those dedicated desks.

Then, in what now can be considered a coup, Target acquired the subscription same-day delivery company Shipt, which has been busy delivering for it and other retailers, including the supermarkets and drug stores the operation has signed up. Shipt CEO Kelly Caruso, in early April noted that the operation had set out to add 70,000 shoppers to an employee-base that picks up products in stores for delivery to consumers ordering the goods. She added that, by April’s end, Shipt planned to double the number of shoppers it employed, which will leave Target with a more robust delivery subsidiary as more normal market conditions return.

Target’s flight into and beyond the coronavirus crisis began in February, when it began to feel the effects of the pandemic in stores. Comparable sales began to gather steam. Target enjoyed a 3.8% comp advance for the month, with gains across multiple categories. In mid-March, traffic and sales surged, while category mix became heavily concentrated in the essentials and food and beverage segments. Sales trends moderated later in the month with shelter in place instructions becoming more prevalent. At that point, according to Target, in-store sales weakened even as digital sales accelerated dramatically. For the month in total, comparable sales increased in the low double digits, reflecting mid-single digit growth in stores and more than 100% gains in Target’s digital channels. Across the company’s merchandise assortment, March comparable sales increased about 40% in both essentials and food and beverage, Target maintained, and by about 20% in hardlines. For the month, comparable sales declined in the low single digits in home and more than 30% in apparel and accessories.

Late March sales trends improved beginning April 15. In the month up to about April 22, comparable sales increased more than 5%, with store comps down in the mid-teens but digital comps up more than 275%. At that point, core category comps had grown more than 12% in both essentials and food and beverage, better than 30% in hardlines and in the high teens across home segments.

In terms of store visits, things were picking up again. According to store traffic tracker Placer.ai, Target enjoyed more store visits in the second week of April versus the one before turning around a trend that had begun in early March, even if the gain was only 1%. A week later though, Target gained more momentum with foot traffic up 19.4%.

At the same time, a shift to lower margin categories had a negative effect on bottom line performance, but Target saw positives in the circumstances.

“While we expect our short-term profitability to be affected by COVID-19, we expect to have the financial capacity to emerge from this crisis in a position of strength,” said Target evp and CFO Michael Fiddelke. “Having established an even stronger bond with our guests during this unprecedented time, we expect to have a compelling long-term opportunity to grow profitably and gain additional market share in the years ahead.”

By April 24, as part of the Reuters Events seminar “COVID19: Supply and Demand Management,” Alexander Wheeler, Target senior director, food supply chain, said the company has had success shifting operations toward digital and fulfillment, and is looking to define recovery parameters. March was a turning point, Wheeler said, particularly in major cities hit early with stay at home orders.

Still, Target was fortunate in its Shipt acquisition, Wheeler said, which helped the company keep moving volume as business across retail shifted online. The question at April’s end became: How does the company pivot from responding to the near-term demands and start to get a footing on medium term adjustments? Target demonstrated to itself that it has built in the flexibility to quickly shift its online operations and fulfilment, he said. In store, the company quickly realigned schedules and assignments, transitioning, in one example, employees in the Starbucks operation into the main retail business, maximizing applied labor. Wheeler said that the Target experience responding to the coronavirus crisis put it in a better position to act as market conditions shift from a lockdown phase to what comes next.

Morgan Stanley analyst Simeon Gutman recently reduced his earnings per share estimate on Target, but the negative outlook was not exactly bleak.

“We temper our assumptions for both sales and margins in 2020, with gross margin pressure the main headwind to Target’s near-term earnings power,” he indicated in a research note. “We model a meaningful improvement in 2021 as the economic backdrop normalizes.”

He asserted that a category mix shift away from lower-margin categories is likely as part of the e-commerce mix shift reverse. But he expects a higher level of permanent e-commerce penetration to occur, which suggests that Target’s omnichannel strategy should gain traction out of the coronavirus crisis.