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Target: Omnichannel is Changing and So is Target

Thomas Paulson
Mar 8, 2024
 Target: Omnichannel is Changing and So is Target

On its Q4 2023 update, Target provided their thoughts on what their segment of retail looks like today and tomorrow. Management also shared their vision on how they are positioning Target to remain relevant to consumers in a fashion that is unique to Target, take market share, and produce durable revenue and profit growth.

According to Chief Growth Officer Christina Hennington, “Shopping looks very different now than it did a few years ago. It's no longer a point-in-time transactional event. Consumers today are constantly taking in new information and seeking inspiration from influencers and trendsetters. Target is already a trend shaper, but there's an opportunity to accelerate this further on both the platforms we own and on external platforms like TikTok and Instagram…[W]herever and however a shopping journey starts, the path leads back to Target as a destination.” Chief Guest Officer Cara Sylvester shared that, “the days when people would follow a consistent and well-defined path from discovery to purchase. Today, shopping is nonlinear and simply a part of the general ecosystem of our lives. Instead of a stand-alone experience that feels planned or predictable, shopping has become immersive, always on and fully integrated into how we all go about our days. A large portion of U.S. consumers--about 40%--start their purchase online and 20% start on social platforms. And those are just the people who are actively looking to shop. Many more are enticed to shop by the inspiration they find scrolling their social feeds for hours every day. This is expansive retail, nontraditional entry points, seamless transition between stores, online and social and fully in tune with what shoppers want and need...More than half of guests who make a purchase in our stores have visited our app or our site that very same day, reinforcing how shoppers move fluidly from physical to online and back again.”

To accommodate shoppers moving between physical and digital channels, Target CEO Brian Cornell outlined several initiatives this past week. “Over the next decade, we expect to open more than 300 new mostly full-size stores...while continuing to remodel stores with plans to invest in the vast majority of our nearly 2,000 stores in the next 10 years. We'll also continue to invest in our supply chain and technology...At least 10 additional supply chain facilities are in the pipeline, and we'll be operating within the next decade.” In addition, next month Target will be launching an unlimited same-day delivery program through a new membership feature called Target Circle 360. Going forward, Cornell wants to "build unmistakable recognition for Target same-day delivery.” The current Circle loyalty program has “well over 100M members"--we assume this means somewhere around 110M members, which represents an incredible 61K per location. For Q3 2023 (a non-holiday period), that works out to an impressive capture rate of 54% (assuming 113K visitors per store during the period) and significant growth compared to 2019 (where we estimate a capture rate of 43%).

On the size of the 300 stores and potential locations, Cornell commented, “Over the last couple of years, you've seen us move from a focus on small stores...and we've been very pleased with the performance of these new full-size stores as well as the continued performance in urban centers and on college campuses. So as we look at our pipeline going forward, we recognize there's opportunities for more full-size stores, extend our proximity, bring the best of Target into some new trading areas. And as part of that, you will see us continue to expand our food and beverage offering. Rick talked about the progress we've seen in food and beverage and adding over $8 billion in the last couple of years and the strength of a brand like Good & Gather. For many of you who are tracking the consumer packaged goods industry, there aren't a lot of $4 billion brands out there...So we're excited about the pipeline. It will be more larger-sized stores. There will be a broader food offering. And we're going to be moving into trade areas where we can pick up incremental volume and market share because we, in many cases, just haven't competed in these trade areas in the past.”

The 300 new stores are expected to produce an average of $42M in annual sales volume, or 80% of the existing base – i.e. the vast majority will be large format. COO Michael Fiddelke commented, “It's actually the big box stores where we're able to bring the best of Target that are bubbling to the top in terms of where we expect returns to be strongest. And so we'll lean into that shift over time. If our properties team was here on the stage with us, they could roll out a map of the U.S. and show a bunch of main and main locations where we'd love to bring Targets to new communities, and we feel good about what that pipeline looks like.” We suspect that there is strong overlap between Target's pipeline map and a map of some of the small-to-medium-sized markets (roughly 200K to 1B in population that have seen meaningful increases in household income the past four years) from Placer's Migration Trends Report (below).

Sylvester discussed more benefits of the Circle 360 program: "[N]ot only do you get 5% off every trip, and extended returns and free shipping, you also get all the benefits of the base Target Circle program, which are those deals that our guests love and those personalized rewards that are based specifically on your shopping behavior. The other thing that we're adding for our cardholders is an evergreen price of $49 for Target Circle 360...You will get the magic of Target delivered to your door in less than an hour. You'll also have access to the Shipt marketplace of benefits. You will also have access to all of those deals and rewards and personalized perks as part of the base Circle program. It's just the beginning for us, that $49 is an intro promotional price for Target Circle 360.”

As to Target’s offering and merchandising, Hennington said, “We have long been known for delighting guests through a carefully curated set of products and partnerships. We believe that a well-curated assortment isn't just good for managing inventory. It can be additive to the shopping experience, too. Here's an extreme example. Imagine a restaurant with a seemingly infinite menu with countless of pages of every type of cuisine and no cohesive point of view. Endless choice creates decision fatigue taking away from an otherwise joyful outing. Sometimes less is truly more. We make choices that allow us to offer a menu of products, designing to serve a wide variety of guest needs, helping to guide their shopping journey while ensuring a joyful and productive trip. Now to be clear, this does take balance. We don't offer an endless aisle, but we do offer a compelling range of choices and price points throughout our assortment.” To our ears, this sounds a lot like what Macy’s next chapter is seeking to offer, as we wrote about last week.

As it relates to Q4 2023 results, Target reported a soft comparable-store sales as expected (-4.4% on a consolidated basis and -5.4% for physical stores) but surprised with much stronger earnings and constructive comments about store traffic. Our data shows +5% visitation gains during February, followed by a weather-disrupted January (below). November and December were also solid.

For the quarter, gross margins were up nearly 300 basis points on inventory-related costs, lower freight costs, lower supply chain and digital fulfillment costs, favorable category mix, and a lower shrink accrual. On the merchandise mix--which has been a headwind all year with lower-margin consumables category sales up and higher-margin discretionary category sales down--management said that its discretionary sales declines moderated during the quarter, a consistent trend across retail from Walmart to Nordstrom.

On shrink, Fiddelke said, “Happily, we've seen some encouraging trends recently resulting from both the actions we've taken and the community efforts we're seeing across the country.” Thus, another proof point, following TJX’s comments from last week, that the scourge is lessening. It’s a big scourge for Target at around $3B in retail $-volume. As noted last week, driving theft down would be a major positive for retail and business districts overall.

As it relates to current consumer trends, Hennington shared, “While there are some encouraging signs in the economy, there are also stubborn pressures impacting families and retail. Consumers say they still feel stretched, they're balancing a lot and having to make trade-offs to meet their needs of their families while sprinkling in the occasional luxury. And yet their affinity for style and newness plus early signs of disinflation contributed to a sequential uptick in discretionary category performance over the last 2 quarters, something we aim to build on and accelerate. At the same time, we expect consumers will remain highly value-conscious, hunting for great promotions and seeking comprehensive value in their purchases. Consumers are also creating stability with small doses of everyday joy.“ (This view aligns with our earlier outlook on 2024).

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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more. He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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