A focus on innovation and improving the customer experience could lead to stock price growth for Target Corp. (TGT, Financial). The retailer is investing in its stores as well as in new product lines and its digital offerings.
Although there are potential risks ahead from increased tariffs and a weak consumer environment, the company’s focus on becoming more efficient could strengthen its competitive position.
Having gained 2% in the last year versus a 6% rise for the S&P 500, the stock could offer good value.
Improving the customer experience
Target continues to invest in its stores, having remodeled over 400 locations in the last two years. As part of its initiative to improve the shopping experience, it is installing new fixtures, designs and technology. It plans to remodel 300 stores this year, and another 300 stores the following fiscal year. The impact the remodels are having on sales is an increase of between 2% and 4%. The addition of 100 small-format stores could catalyze sales in 2019 as they generally deliver more sales per square foot than the company’s larger stores.
Alongside an improved store layout, the company is seeking to boost customer engagement through better service. For example, it has committed to raising its starting wage to $15 per hour by 2020. This could lead to improved employee satisfaction levels, translating into a better overall customer experience.
Customer loyalty may also grow through greater personalization and engagement. A new program called Target Circle rewards guests with a 1% rebate on their shopping, as well as individual special offers. The program is being expanded to more locations, providing data on shopping habits that could lead to greater efficiency.
Innovative strategy
Investments in the online business are set to further increase Target's revenue as digital sales grew 31% in the most recent quarter. The company’s continued investments in its stores is providing it with a platform to offer increasingly flexible delivery and pickup options to online shoppers. For example, its drive-up service provides delivery to a customer’s vehicle in a Target parking lot. With almost all such deliveries taking less than two minutes, net promoter scores are generally high and suggest the service is generating a high level of repeat business.
Having introduced over 20 new brands in the last 18 months, innovation in the company’s products may also catalyze its financial prospects. As a result, it is seeking to find white space opportunities within its portfolio where new brands have the potential to quickly grow market share. This strategy could attract a wider range of customers, which may lead to cross-selling opportunities.
Risks
The trading environment for the retail segment could become more challenging. Recent increases in tariffs on imports from China are likely to be passed on to consumers in many cases. This may put further pressure on retail sales, which have grown just 1.3% since last August. The prospect of tariffs eventually being placed on all imports from China could lead to deteriorating investor sentiment toward the wider retail sector, and may cause increased volatility in Target’s stock price.
In response, the retailer is seeking to become increasingly efficient in order to boost its competitive advantage. For example, Target is increasingly leveraging its store network to ship orders faster than competitors who use upstream fulfilment centers. Around 75% of Target's online orders are now fulfilled by a local store. This reduces the cost of shipping by as much as 40% per unit versus upstream shipping. The company is also investing in its supply chain by building custom automation solutions to reduce the amount of operational work, such as unpacking boxes, that is undertaken by staff.
Outlook
In the current fiscal year, Target is guiding for 6% earnings per share growth. This suggests its price-earnings ratio of 13 represents good value, given the changes it is making to its business model in order to deliver a higher rate of growth in the long run.
With a major investment program that is expected to improve the shopping experience for customers, as well as increasing levels of innovation, the company seems to be successfully differentiating itself from rivals.
Although risks are ahead for the wider retail segment, its efficiency drive could lead to a stronger competitive position.
Having underperformed the S&P 500 in the last year, the stock could offer investment potential for the long term.
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