Equities

Over the past year US retailer Target (TGT US)*, the company with the famous ‘bullseye’ logo, has defied sceptics with its ability to adapt to the disruption of ecommerce and the onslaught of Amazon. Target successfully launched a transformation strategy to evolve with consumers’ changing need for speed, rewarding shareholders.

Target ($55 Bn market cap) has represented good everyday style and great value for decades - made possible by clever merchandising using its own private labels. This, alongside its wide reach of ~1800 stores across the US made it a mainstay for young families. But several years ago, the business looked deeply troubled as incumbent brick and mortar retailers, Target included, failed to meet the modern consumers demands for faster, more convenient, digitally enabled shopping. Target thought hard about how to survive this disruption and leverage its incumbency; something most retailers have found incredibly difficult to undertake.

A new strategy was put in place, initially at a cost to cash flow and profits, requiring large capital reinvestment in stores and technology; it is proving to be transformational. First it had to improve the online experience for those who went to Target.com, as well as modernising and improving the merchandise in Target stores. Second it undertook to meet the need for fast and convenient receipt of goods, but not by trying to match Amazon at its own game. Instead it built out several fulfilment initiatives:

  • It acquired Shipt, a business offering free delivery (same or next day) from many retailers including Target for an annual subscription fee.
  • It created “Drive Up” – shop online at Target and then have your items brought out to your car by Target (wait times are less than 2 minutes!).
  • Shop online and pick up in store that day, at a time that suits you, quickly and easily

Most Americans live within a few miles of a Target store, and drive their car every day, especially those living outside major cities. So, providing rapid ‘from store’ fulfilment, in a seamless way, to you, your vehicle or your house, is the ultimate convenience. Target estimates that store pick up is 90% cheaper, per unit, than shipping from a warehouse.

Good retailers have evolved with changing consumer needs and tastes for decades. Others don’t survive. While ecommerce has been one of the most rapid and disruptive changes in our lives, we believe Target has found a way to once again deliver a wonderful shopping experience. There is a significant ceding of market share still underway in the US, as department stores, strip and mall-based specialty retailers find they cannot cover costs without the old levels of foot traffic. Target, Amazon and others are winning share.

Truthfully, most market participants have been, and many remain, extremely sceptical that Target’s model works. We believe the 2Q19 results give clear signs that it can and will survive through its adaptation and sharp execution. 2Q results saw strong comparable store sales growth persist, led by online growth which is increasingly fulfilled by its new, same day and cheaper options. Margins rose strongly and operating profits were up 17%. The stock jumped 20% on the day, suggesting many had very different expectations! Revised guidance has led to ~4% upgrades to annual consensus estimates and the stock has hit 52 week highs. In our view, the strategy remains in its early innings; Target will continue to be a share gainer in the US and while the US consumer remains resilient, Target can continue to exceed expectations. Within a difficult retail sector, Target is delivering clear earnings

*Note: Target (TGT US) is not associated with Wesfarmers-owned Target Australia.

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