If I had to sum up the tone of the Target Financial Community meeting today in one word, it would be redemption. Target’s 2018 numbers were the best results they have seen in 15 years. CEO Brian Cornell was quick to remind the analyst community that when Target laid out its turnaround strategy in 2017 there were a lot of skeptics. There was clearly satisfaction taken today for proving the disbelievers wrong and for showing it could achieve such great results by building out an ecosystem that revolves around the brick and mortar store.
Here are a few major takeaways from today:
Q4 earnings closed out a strong year
As expected, based on its holiday results previously released, Target delivered a strong performance for the quarter and the year. Fourth quarter comparable sales grew 5.3 percent on traffic growth of 4.5 percent. Comparable store sales grew 2.9 percent, and comparable digital sales grew 31 percent. The Company reported adjusted EPS of $1.53 for the fourth quarter. Full-year adjusted EPS were $5.39.
An omnichannel ecosystem can be the key to eCommerce, not just to keeping stores alive
This was almost a text book lesson on why omnichannel is important. The fact that stores fulfilled nearly three quarters of Target’s fourth-quarter digital sales solidifies that we are in the age of omnichannel retailing and retailers need to move beyond thinking about eCommerce as a siloed channel. But the story went well beyond that. By connecting stores and .com, Target has not only increased sales in both channels, but it has lowered costs associated with fulfilling online orders given that pickup at store is more profitable. In addition, store-based fulfillment has cut down on last mile delivery time and cost.
While all of that is great news for Target, I thought the more interesting part of the omnichannel conversation was related to replenishment. By looking at the full supply chain ecosystem and not by channel, Target has identified ways to change upstream capabilities that give stores team members more time on the sales floor with guests. While not fully scaled yet, the most advanced example of this is loading replenishment carts at the distribution center that have product ready to be stocked on shelves and is sorted by aisle. Beyond giving team members more time on the floor it also allows for minimal backroom storage resulting in more space for fulfilling digital sales – ultimately allowing the small store model to run efficiently. I highlight this not to give a full explanation as to how it works, but to emphasize how changing a process at a distribution center can drive in-store experience – two things that might not seem obviously connected.
Private label brands are driving differentiation that translates into growth
Target has launched 20 new brands and those brands are creating shopper stickiness. The retailer says that these new brands are really worth more than the sum of their parts because the brands are allowing them to have authority and credibility in relevant categories. Said a different way, guests are giving Target credit for its hip brand portfolio, even if they don’t buy all of those brands. Even more importantly, Target says the new brands give it a wider style aesthetic which is attracting new guests. Given Target’s shopper penetration still sits well below pre-credit card breach levels, this is critical for sustained success. Going forward Target says that the pace of brand launch will slow and that it believes it can anniversary the strong results associated with the brand launches. Target did not mention if the slower velocity of brand launches meant that consumables brands would remain untouched.
Taking advantage of the TRU and BRU misfortune
Target mentioned several times on the call the benefits it saw from Toys-R-Us and Babies-R-Us store closures. It saw significant market share increases in a number of categories and the increase was large enough that it negatively impacted margin for the year given the mix shift towards lower margin categories. Target expects the impact from TRU and BRU will be seen through Q1 both in terms of sales and margin. Target was already a key player in this area, but I would expect we see it leverage this positive momentum to move towards more domination in the categories. Look for Target Circle and Target+ to help drive this.
Capex moving forward
Target shared less detail on how it will spend its Capex in the next few years compared to what we have seen other retailers provide. That said, it did share that it will maintain Capex at $3.5B in 2019 and 2020. Store remodels is where the most detail was given, stating that it is looking to remodel ~300 stores in both 2019 and 2020 (~600 stores in total). New store growth will continue to be with the small format. Beyond that, Target says no big investment is looming. It feels like it has righted the ship with the over investment in Capex in 2017 and can focus on scaling and growing current investments in the upcoming years.
Staying focused on the fundamentals
There was little talk of Target Circle or Target+ on the call. On one hand it is positive to see Target focused on the fundamentals – its concerning when retailers get distracted by shiny new initiatives – but it will be important that these initiatives drive traffic and increase penetration for Target in the long term. We will be closely watching for further updates on both initiatives in 2019.
Overall, a great year for Target. Not only has it delivered results, but it has changed its way of thinking to truly be omnichannel. Throughout 2019 we will be watching to see if this momentum can be sustained and if it can be translated into increased shopper penetration that gets Target back to the broad reach it enjoyed in the past.
If you are a KRIQ subscriber, look for a more in-depth recap once Target has posted the presentations that were covered today.
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Tory Gundelach, Vice President