Joe Raedle
Target (NYSE:TGT) – as a retailer – is increasingly susceptible to changes in consumer behavior and the economic environment. A slowdown in consumer spending and the continued acceleration of inflation, coupled with the fall in stimulus cheques, has impeded Target’s growth prospects for 2022.
Retailers, such as Target, are dependent on consumer loyalty. This loyalty is vital in driving continual in-store traffic in periods of depleted consumer dollars. Same-store sales are instrumental to the next stage of growth for Target, as management is encompassing a decrease in capital expenditures (on brand new stores), to facilitate the reduction in supply chain costs (transportation), labour costs and inventory buildup.
Fulfillment
Target has increased Capex spending on productivity to reduce the inherent inefficiencies within the business. The most notable of these changes is the use of stores as “mini-fulfillment” centers for online orders. This is estimated to save Target 40% relative to orders being shipped from distribution warehouses.
Same-day orders further accentuates this reduction in costs, as orders fulfilled in-store are found to decrease costs by 90% relative to fulfillment through a warehouse. This use of stores has been flagged by management and analysts alike, as a measure of assisting Target to maintain manageable levels of inventory which should relieve marginal pressure on gross margins.
The ability of our store teams to ship local orders out our back doors continues to increase our speed to guests, while delivering cost savings of more than 40% per unit versus upstream shipping
When customers order online and pick up at a store, use curbside pickup or select shipping via Shipt, about 90% of the cost goes away.
Mark Schindele, EVP and chief stores officer
As with any labour-intensive business, automation is critical in reducing costs and increasing margins, while also shielding from the unpredictable nature of labour. Target has implemented sorting centers that are a product of the $5 billion in capital expenditures that are available to streamline the supply chain and cut costs.
The sortation center process cuts out that sortation step so the store just focuses on the picking and the packing. Once packages arrive at the sortation center, Target’s proprietary technologies acquired from Grand Junction and Deliv determine the most efficient way to sort, route, and deliver to local neighborhoods. Sorting packages into batches by neighborhood makes deliveries easier.
WarehouseAutomation.ca
Traffic
Target is increasing its offering to consumers by becoming the ‘one-stop shop’ for fun browsing. This, coupled with the large-scale renovations and partnerships to upgrade store design, has allowed traffic to soar vs competitors. Conserving the strength in traffic will be instrumental in factoring in growth forecasts for 2023.
Forbes
Target’s relationships with brands such as Apple (AAPL) and Ulta Beauty (ULTA) can allow the revenue run rate to exceed expectations. These relationships are instrumental in the ongoing renovations and are vital in the implementation of new stores, which are found to increase sales. Target is facilitating continual growth through an increase of ‘Shop-in-Shop’, in conjunction with its Ulta partnership.
Target
The implications of this partnership are important to understand as this could prove to be a defining factor over the next cycle. The Beauty and Essentials segment accounts for 25% of Target’s revenue, and importantly, has been the fastest growing department over the last 3 years. The benefit is further exhibited as margins within the beauty categories are empirically 2x higher than most consumable products. Target has experimented with the new Shop-in-Shop format and have decided to roll it out in 800 locations due to the increased productivity and the ~13-16% lift in sales. The continued Capex investment in renovation and the distinct nature of the Shop-in-Shop experience (different lighting and distinct signs) could continue to drive in-store traffic which is vital for ‘cross contamination’ between departments.
Target’s renovations have been estimated to increase same-store sales by an average of 2-4%. New cleaner interiors with bright colors (as implemented in the Ulta Shop-in-Shop) have continued to drive traffic. Management has implemented plans to renovate 200 stores in 2022, with Capex spending concentrated on renovations and supply chain enhancements. Further spending on remodels will further enhance Store-in-Store experiences and allow the company to increase its partnership offerings to include the likes of Apple and Disney (DIS).
Target
Target has continued to drive growth within the food department, as the implementation of grocery-like-consumer behavior will increase store visits. These increases in-store visits can therefore translate into interdepartmental sales. Target has reached a milestone of $20 billion in food and beverage sales in 2021. The company has chosen to focus on two aspects of the F&B segment: Health and Fresh Foods. Introducing fresh foods is instrumental in driving repeat (and frequent) visits from consumers.
Because of our unique stores-as-hub model, more than three-fourths of our first-quarter digital sales were fulfilled by our stores. That means, in total, more than 95% of Target’s first-quarter sales were driven by our store assets, store inventory, and store teams. This store-driven growth is translating to outstanding bottom-line performance.
Brian Cornell, May 2022
Target Plus
Target Plus is an innovative marketplace that takes shape in the form of exclusive offers that attempt to limit “shopper’s paralysis” (The psychological effect of being provided too many choices).
This is presented on the basis of limiting the options available to consumers by exposing shoppers to ‘invitation only’ sellers. This strategy does not lack in offerings however, rather it streamlines the process to ensure a faster and more efficient experience on the part of the customer, and sales growth on the part of the company.
Financials
Target’s revenue grew 3.65% in 2020, a year in which US GDP declined by 3.5%. The recession of 2020 was starkly different from the environment we may enter and this will provide tailwinds for revenue growth but headwinds for operating margins.
Target sent shockwaves through the market in May when it announced the liquidation of excess inventory due to the economic environment. We are yet to see if this strategy was a success, which will be vital to the performance of the stock over the next year. While much is already priced in, there are a lot of unknowns given Target’s sensitivity to consumer confidence.
Rising inflation will force retailers alike to increase pricing to salvage gross margins. This process, in a fiercely competitive industry, could see consumer loyalty shift for or against Target. This further iterates the importance of management’s ability to deliver outsized value to consumers as they reconsider every dollar spent. Increasing labour and supply costs are continuing to hinder growth and put pressure on margins and further heightens the sensitivity target to the implantation of increased pricing.
Target will continue to face elevated supply chain costs throughout 2022, with multi-decade low consumer confidence taking effect in reduced consumer spending at retailers. This, coupled with increasing competition, will see consumers shift spending habits to conserve purchasing power. This dynamic between increased costs and the balancing rope in raising prices to protect gross margins and sustaining costs will continue to dampen profit and margins.
Final Thoughts
Productivity is at the forefront of Target’s growth and is critical to the continual Capex spending that is currently being undertaken. Target will struggle to maintain margins as consumer confidence continues to drop to multi-decade lows. This could continue to put downward pressure on Target’s share price until mid-2023.
Source: https://seekingalpha.com/article/4542859-target-stock-buy-just-not-now
