Target Corp. (TGT, Financial) could make further stock price gains after its 78% surge over the past year.
The retailer is increasing its differentiation versus competitors, is seeking to improve its customer loyalty levels and is aiming to boost its efficiency.
Innovative growth strategy
The company launched its new food and beverage brand, Good & Gather, in the third quarter. Since the products do not include artificial flavors or synthetic colors, they could appeal to a growing number of consumers who are seeking simpler ingredients in the foods they eat. The brand recorded strong demand from consumers following its launch. Target will roll out the brand’s full assortment of 2,000 products by the end of fiscal 2020, and it expects Good & Gather to become its largest owned brand over the long term.
In addition, the retailer launched 25 Disney (DIS, Financial) concessions within its stores in the third quarter. They offer over 100 items that are not available outside of Disney’s own stores. This could increase the uniqueness of Target’s offerings and help to differentiate it from sector peers. The concessions may provide Target with cross-selling opportunities among its higher-margin products to consumers with whom it does not have an existing relationship. It plans to open 40 more concessions within its stores in 2020, which could catalyze its financial performance.
Customer loyalty
The retailer launched its new loyalty program, Target Circle, in the third quarter. The program already has over 35 million members. Its members have visited the company’s stores more frequently and spent between 2% and 5% more than non-members. A further increase in the program’s membership could lead to rising sales per customer for the business, as well as increasingly loyal customers.
Target has integrated delivery company Shipt into its website and mobile app. Shipt provides a simple and speedy delivery service that could increase Target’s appeal among consumers. In addition, the company is aiming to improve the shopping experience for its customers through doubling the number of staff that are dedicated to order fulfilment. This should provide the retailer’s customers with faster and more reliable delivery, which may improve its customer satisfaction scores and lead to higher repeat business in the long run.
Potential threats
The company’s selling, general and administrative expenses increased 0.2 percentage points in the third quarter on the back of rising labor costs. While consumer confidence has declined in each of the last three months, higher minimum wage rates across the U.S. may lead to the retail sector experiencing rising costs that put pressure on margins. The result of this could be reduced profit growth for Target in the short run.
In response, the retailer is aiming to increase its efficiency. For example, it is investing in a new inventory system that could improve its on-shelf product availability and reduce waste. The system is currently active for 15% of the company’s product assortment, and its gradual rollout across all of Target’s products may reduce overall costs. Additionally, the retailer is rolling out automation at its distribution centers. This could reduce its labor requirements following initial upfront costs to install the required machinery. These initiatives may lead to the company experiencing a slower pace of cost growth and improving profitability.
Future prospects
Analysts forecast that the company will record an 8% increase in earnings per share for fiscal 2021. Its forward price-earnings ratio of 19.8 suggests it offers good value for money given its growth strategy.
Disclosure: The author has no positions in any stocks mentioned.
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