What Can Target Learn From Wal-Mart's Retail Game?

In early November, reports emerged that Target Corporation TGT was looking to shutter a dozen stores by February next year. A spokesperson for the company commented that this was part of an annual process aimed at closing underperforming locations. But Zacks Rank #3 (Hold) Target's decision serves to illustrate the dilemma facing the retailer and its competitors and the need to react effectively to new challenges.

Brick & Mortar's Challenges

It's not that it's been a bad year for retail overall. According to data from the Department of Commerce, retail sales registered a year-over-year increase of 3.9% up to October. Of course, not all sectors have managed to latch onto gains. The challenges faced by brick and mortal retail have received wide coverage. But the condition of department stores is particularly acute.
 
Over the same period, department stores witnessed a 2.8% decline in sales. The challenges faced by the department store segment are reflected in the fortunes of brands such as Macy's, Inc. M and Sears Holdings Corporation SHLD, which have had to close a number of stores in response to the decline in shopping traffic.

Wal-Mart Aces Results, Target Lowers Outlook

Standing head and shoulders above the rest of the competition is Wal-Mart Stores, Inc. WMT, which reported solid third quarter earnings and raised its view on Nov 16. The stock has a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

The company raised its bottom-line view for fiscal 2018 and now envisions adjusted earnings in the range of $4.38-$4.46 per share, as compared with the prior expectation of $4.30-$4.40. (Read: Walmart Stock Gains on Solid Q3 Earnings & Raised View)

Target also reported strong third quarter results, but shares of the Minneapolis-based company declined 4% in pre-market trading on Nov 15.  This is because the year-over-year decline in the bottom line and management's commentary about highly competitive environment in the fourth quarter was not well perceived by investors.
 
Target now envisions fourth-quarter earnings in the band of $1.05-$1.25 and fiscal 2017 earnings between $4.40 and $4.60 up from $4.34 and $4.54 per share, projected earlier. (Read: Target Falls Despite Q3 Earnings Beat: Here's Why)

What did Wal-Mart Get Right?

So what exactly did the iconic discount retailer get right? After years of sluggish sales, Wal-Mart got its act together primarily through a two-pronged approach. Firstly, it has invested billions of dollars in technology in order to fortify its e-commerce presence. And its success on this front can be gleaned from e-commerce sales recorded between Black Friday and Cyber Monday this year.

Wal-Mart's share of online expenditure during this period has jumped to 10%, more than twice as much as the proportion recorded a year ago. Much of this success can be attributed to its acquisition of erstwhile Amazon AMZN competitor Jet.com last year for $3 billion.

Human Factor Holds the Key

Further, in order to facilitate delivery, Walmart recently acquired a delivery startup Parcel, Inc., which is a last-mile delivery service and specializes in same-day delivery for perishable and non-perishable products. Other than this, the company's Walmart Pickup program enables customers to place orders online and then pick them up at a store for free.

Even though the spotlight is squarely on Wal-Mart's online efforts, the largest portion of the retailer's new found vitality has come from its strong investments in people. Around two years ago, Wal-Mart decided to invest $2.7 billion in higher wages and training, a move which did little to cheer market watchers. But it's one that has paid off, helping the shares close in on the $96 mark post third quarter earnings.

Did Target Miss a Trick?

Firstly, Target has put in a considerably better performance over the last six months. The company's strategic endeavors and turnaround plan has helped it gain 7.9% over the last six months, though it has still underperformed its larger rival and the broader market over this period.

 
Target needed to take a fresh look at its strategy after a misadventure in the food segment, a hacker attack and the now all too familiar threat of Amazon led its shares to decline by more than 16% over the last two years even as the S&P 500 gained more than 13%.

And its investments in technology and people as well as its decision to experiment with a larger variety of store formats seem to be paying off.  During the third quarter, Target experienced a 1.4% increase in store traffic while the same metric is now up 0.9% year to date. This reverses the decline in traffic, which the franchise was facing at the beginning of the year.

It's Aggression That's Missing

Even though Target may be doing similar things, it is missing out on the speed and scale of Wal-Mart. Its investments in people and technology are far lower than that of its larger competitor. For instance, Target received significant media attention after raising its minimum wage for associates from $10 per hour to $11.
 
But this is still miniscule compared to the mammoth investments Wal-Mart had invested in its area. With shelf stacking time significantly reduced, the iconic retailer's associates are now free to assist its customers. But what Target seems to be really missing out on is a bit of aggression.

Though Target has recently adopted a cost reduction strategy, Neil Saunders, managing director of GlobalData Retail recently commented that were execution related issues with its new Project 62 home label.
 
"It is almost as if Target lacks the confidence to push this range heavily," Saunders said. In contrast, Wal-Mart has upped the ante against Amazon, proactively cutting prices and offering discounts to counter the online behemoth.

How Target Plans to Right its Ship

All's not lost for Target and it has made strong strides in several areas. Firstly, it has decided to introduce flexible format stores in order to increase its presence in densely populated urban locations. Also, it has significantly developed its online platform and aggressively reduced costs.

For instance, the retailer is trying to find new ways to leverage its extensive network of 1,800 stores. According to Target, nearly 50% of its digital volume is being fulfilled by its store network, a proportion which is expected to rise to 80% by Christmas.

But Target's strategy for the near future centers on providing brick and mortar store outlets for discretionary spending which seek to complement online purchases. With this goal in mind, Target has launched several private labels. The number of these instore brands should rise to 12 by the end of next year.

Further, it has decided to provide more premium offerings, such as Goodfellow & Co, which is targeted toward men, a segment which has ignored Target for quite some time.  According to some analysts, its move to differentiate many of its offerings has made price comparisons increasingly difficult.
 
Conclusion

Some industry watchers still feel that Target lacks the aggression needed to take on the competition. But Wal-Mart's smaller rival has taken several steps to overcome the sluggishness of the past. This is why it could come up with a significantly better performance in the year to come.

 
Amazon.com, Inc. AMZN: Free Stock Analysis Report
 
Wal-Mart Stores, Inc. WMT: Free Stock Analysis Report
 
Target Corporation TGT: Free Stock Analysis Report
 
Macy's Inc M: Free Stock Analysis Report
 
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