Target Is On A Path Of Steady Growth

Target (NYSE:TGT) recently reported its Q4 2015 results, which were in line with the street estimates. While the company’s full year sales increased 2% led by higher traffic, its adjusted earnings per share grew 11% to $4.69.  Target’s signature categories, such as Style, Baby, Kids and Wellness, increased three times faster than the company’s overall growth rate. Also, digital channel sales increased by 34%, which is an industry leading figure. Going forward, we expect Target to continue growing at this healthy pace because of several initiatives taken by its management.  These include boosting its digital sales and rebranding Target by focusing on its signature higher margin categories. We also believe that the current macroeconomic environment is conducive to the growth of the retail industry overal.  Moreover, US consumers are  lot less leveraged than they were during the pre-recession levels in 2007. Other initiatives are helping.  Target keeps  downsizing its workforce to align it with its Seven Centers of Excellence. It is also increasing penetration of its credit card usage by customers to grow revenues.  And it outsourced its pharmacy business to optimize its selling model.  On that note, we discuss below Target’s recent initiatives to drive growth and their impact on the company’s future revenues.

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Importance Of Digital Sales

The brick and mortar stores are engaging in a tooth and nail battle with online retailers in order to revive sales and also fulfill customer requirements and shopping needs through a digital platform. In the recent past, Target has come out with a strategy to match prices with several other retailers across a wide assortment of product items and also indulged in various promotional campaigns in order to attract more customers. As a result of these measures, Target is attracting more site visits and greater conversion rates, evident from its stellar 34% digital sales growth in 2015.The company is standing tall amongst other retailers who seem to be struggling in keeping up with Amazon. Also, the company recorded a 2.4% increase in comp sales out of which 0.6% was attributable to digital channels. The company plans to introduce new initiatives, such as a personal recommendation engine through its “Cartwheel” coupon, which will make shopping easier for its customers by recommending them products of their choice. Also, Target plans to follow in the footsteps of Best Buy by using all of its stores as distribution centers in order to ensure a faster delivery time. Going forward we expect Target to continue this trajectory and derive greater percentage of their revenues from digital sales.

Signature Categories:  A Successful Return To The Past

A few years back under a different management, Target expanded its business to include groceries as its main product offering, in part to make its business more recession resistant. However, the strategy tarnished the brand image of Target by disrupting a store format focused on selling careful assortment of good merchandise at good prices.  However, Target has re-emphasized its focus on signature categories like toys, wellness and beauty products all of premium label. Target has seen the return of its loyal customer base and thus restored its brand image. The fact that its signature categories of Style, Baby, Kids and Wellness grew more than three times faster than the company overall average growth rate affirms Target’s leadership in signature categories. Also, the fact that these signature categories ushered  a continuous growth over the last five quarters shows that the company has finally got its strategic priorities going in the right direction.

Trimming Corporate Overheads

SG&A expenses decreased to 18.1% in 2015 compared to 18.6% in 2014.This was in spite of the fact that Target spent more on in-store labor and promotional activities, which however were offset by dividing Target into seven centers of excellence and paring its workforce in line with these centers. We strongly believe that under the leadership of its new CEO, Target will continue its restructuring program and reduce unnecessary expenditures in order to grow its margins at a steady rate.

Metrics Based Performance

Excluding pharmacy and clinic sales, total RED Card penetration increased to 23% in 2015 compared to 22% in the prior year. Consumers shopping via RED Card tend to spend more in order to accumulate more discount points.

Sale Of Its Pharmacy Business

Recently, Target sold its pharmacy business to CVS Caremark in a transaction that closed in December. This will help Target in a number of ways. Firstly, it will help Target to generate more value for its shareholders by disposing of a non-core division. Also, Target expects to drive greater growth in traffic by housing CVS pharmacy stores within its stores, a concept defined as “store-within-store”.  Also, Target received a total cash of $1 billion, which Target plans to reinvest in store expansion and also to augment its store capabilities.

Target-A Winner During Holiday Sales Season

Target set a new record in terms of its digital sales in the week of Black Friday by offering a  flat 15% discount on every product being advertised on its website.  This generated an exceptional response from online shoppers. Target followed this up with compelling offers like 10 Days of Deals and Black Friday “door busters” in order to drive greater sales in its digital category. This holiday season, Target’s stores took care of 30% of its digital orders through a combination of order pick up and direct shipments. Target’s stores also fulfilled a total of one million orders on Black Friday, reflecting its growing strength as an omni-channel retailer. In order to expand its online channel sales faster, the company now resorts to a cumulative assessment of its overall inventory encompassing both its stores and distribution centers, which in turn helps Target be in–stock on a greater percentage of digital orders.

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