Analysis: Store remodels a ‘vital component’ of Target’s success story
With both Target and Walmart producing good sets of numbers, the middle American consumer is clearly alive and well. However, they are favoring those retailers that have worked hard to deliver a compelling and engaging experience. Target fits nicely into this category and its robust growth figures are a testament to the investment made in stores, products, channels, and marketing. In our view, it is Target’s holistic approach to investment that has gained it a podium place among the retail winners this year.
The overall comparable sales uplift of 3.4% is somewhat softer than those posted over recent quarters. However, it comes off the back of a 6.5% increase last year which was fueled by the fillip of tax cuts and bonuses. In that regard, it is an impressive result which shows Target is engineering its own growth rather than simply fluctuating with the vagaries of the consumer economy.
One of the most impressive aspects of the numbers is that growth has been driven by both the digital channel and stores; sales in the former increased by 35.1% and the latter by 1.8%. The contribution of stores is even greater when the number of online transactions made using in-store pick up and drive up options is considered. Although many in the investment community were skeptical, Target rightly understood the importance of the store to the health of its whole operation. This is why store refurbishments have been such a vital component of the success story.
Looking in more detail at stores, we remain pleased with the performance of the remodels. Our own data show that refurbishment has a positive impact on visit frequency, conversion and average ticket – and that this outpacing effect does not disappear after the first year. This is one of the reasons why we are confident about Target’s future performance: The combined contribution from already completed remodels and new remodels coming on stream should provide a nice upside to the revenue numbers.
Having a pleasant shopping environment in store and range of convenient digital services is all well and good, but it amounts to very little if the product being sold is not relevant to the consumer. This is where the second strand of Target’s holistic strategy in the form of own-brand development comes in. On this front, we are impressed by the performance of now well-established labels like Cat & Jack, A New Day, Made By Design, and Smartly which we credit with securing Target new customers and increased spending across apparel, home furnishings and home essentials. However, we are also pleased with the continued pace of brand innovation with initiatives such as the brand extension of Goodfellow & Co into men’s grooming and the launch of the eco-friendly Everspring home essentials range. Across all these categories, own-brand development has helped Target to grow sales, but it has also protected margins by making price comparison with other retailers more difficult and, in some cases, by taking share from the big CPG brands where margins can be lower.
One of the areas where we have been more critical of Target is the lack of progress in grocery which, other than being uplifted from the store refurbishments, has not been at the heart of the retailer’s strategy. However, this week’s announcement of the new Good & Gather brand across food shows that the company is now turning its attention to this part of the business. We welcome this development and believe that it represents another significant growth vector for Target to pursue. This gives us confidence that Target’s advancement can, and likely will, continue over the next few years.
No comments found