There was plenty to like in Target’s third-quarter (TGT) results on Wednesday,which easily beat expectations thanks to a strong back-to-school season and momentum that held up throughout the period. Shares jumped more than 6%.
For one thing, U.S. comparable sales rose 1.2%, a much better performance than competitors like J.C. Penney (JCP), Macy’s (M), where they fell, and Wal-Mart Stores (WMT), where they rose modestly. It was the biggest jump in nearly two years for Target. For another, Target has been able to dial back some of the intense promotional activity from earlier in the year, when it was desperate to win back customers frightened away by the data breach last year that slammed its holiday sales.
At the same time, Target’s Canada unit continued to bleed money, while in the U.S., the drop in shopper visits continued last quarter. And for all of its talk of an easing of the “promotional” environment, Target will offer discounts on gift cards and has already lifted shipping fees on all e-commerce orders, all the more to fend off an aggressive Wal-Mart.
“We still have work to do to heal the U.S. business,” Chief Financial Officer John Mulligan said on a call with media. At the same time, Target cannot take its foot off the promotions gas pedal, he added. “The environment will continue to be very promotional.”
Still, Target expects for comparable sales to rise as much as 2% this holiday quarter, thanks to a strategy that re-emphasizes merchandise and not just price.
For Brian Cornell, the former PepsiCo (PEP) executive who took the reins in August, it was an auspicious start. But even he recognized that Target must rethink many parts of its business, beyond the holiday season, to re-invent itself.
Here is Cornell’s to-do list both short term and longer term.
1. Target must fix Canada or cut bait if need be
Target’s Canadian foray has thus far been a flop and a big drain on coffers. Comparable sales rose 1.6% last quarter, but Target lost $210 million. And it expects to lose another $100 million this quarter. (Last year, its first in Canada, the retailer lost more than $1 billion.) Target says it has been focusing on having enough merchandise on shelves after out-of-stocks were epidemic last year and alienated Canadian customers. It is also improving its assortment and “sharpening” its pricing there. But so far, data is “mixed” on whether that is helping, executives said.
“They’re not giving us credit for these improvements yet,” Mulligan said of Canadians. So after the holiday quarter, Target will assess its Canadian business though Mulligan wouldn’t elaborate on whether an exit from Canada, where it operates 133 stores (mostly opened in 2013 in old Zellers locations), was on the table.
Either way, Target Canada is on the hot seat this holiday season as the company looks to finally stop losing money from its first and so far only international expansion.
“To succeed in Canada, we will need a major step-change in performance,” Cornell said on a conference call. “We need to see improved financial performance from every Target store in Canada over time.”
2. Add more natural, organic offerings
Comparable sales in its grocery business rose in the low single digits, besting Walmart US’s, which were flat. But Cornell thinks Target needs to fine-tune its assortment to differentiate itself from what has become a more competitive, aggressive field and to more closely fit what a Target shopper wants. That means more focus on natural and organic offerings in the future, Cornell said.
“We are not walking away from food, but we certainly want to make sure we put our mark on the food category with items that are uniquely Target, that are right for our guests, that are on-trend,” Cornell said.
3. Focus more on its “signature categories” like kids and beauty
Target plans on increasing its merchandise assortment in categories like baby, kids, wellness and style and will invest a higher proportion of its capital budget, marketing and product development. In fact, Target’s strength with kids’ merchandise was a key reason it had a strong back-to-school. Beauty was another top category for Target, which is adding “beauty concierges” or brand agnostic consultants who will make product recommendation.
“It does not mean we’re abandoning our other categories, but we will have different expectations for those categories compared to the ones in which we’re investing to outperform.”
4. Allow each Target store to meet local tastes
About 15 years ago, Target stores were pretty much all the same, in terms of format, and assortment. But Cornell said localization and personalization will be “key” to Target in the future to a much bigger extent than it has up to now.
“Our guests expect each of our stores to reflect the local communities in which they operate,” Cornell said. Target has been testing that idea at its Target Express store in Minneapolis, its first small format store, where it is offering merchandise specifically for that community.
5. Get more shoppers into stores
Traffic, or the number of shopper visits, fell 0.4% last quarter, a slighter decline than Target experienced in recent quarters—and certainly better than those of many other retailers. Still, it was a decline. So in addition to beauty concierges, mannequins at many stores to showcase apparel and spur buying, Target has been investing in tech to get people into stores, including the ability to pick up online orders at a Target.
“We need to get to a place where we continue to grow traffic in our stores,” Mulligan said.