Target is fighting a two-front war against Amazon and Walmart.

On the one hand, Amazon dominates online retailing and has encroached into physical retail with the expansion of its brick-and-mortar bookstores; opening of the Amazon GO grocery store without cashiers; and the acquisition of Whole Foods. Walmart has built off its network of 5,000 U.S. stores to expand into e-commerce.

But Target is holding its own – but also paying a price — as shown in Target’s fourth-quarter and full-year 2017 earnings results, announced March 6.

First, the good news for Target:

  • Digital sales up: Target reported online sales growth of 29 percent for the fourth quarter, and online now accounts for 8.2 percent of the company’s revenue versus 6.8 percent one year ago. According to CNBC, 2017 marked the fourth-consecutive year Target saw online sales growth of more than 25 percent
  • Same-stores beat expectations: Same-store sales for Q4 achieved 3.6 percent growth versus an increase of 3.1 percent expected by analysts
  • Revenue beats expectations: Q4 revenue rose to $22.8 billion, beating analysts’ expectations of $22.5 billion

But shortly after Target announced earnings, its stock fell. Why? Because of one piece of bad news: the company reported adjusted earnings per share of $1.37, below $1.38 expected by analysts.

Improving the In-Store Experience

The earnings results demonstrate just how difficult it can be for a large, publicly traded retailer to improve for the long run while satisfying short-term expectations. One of the pillars of Target’s future growth is a stronger investment into its in-store experience – efforts that can make costs rise. Indeed, in recent months, Target has:

  • Refurbished its merchandise selection. The company has eliminated tired brands that were underperforming and injecting life into its store aisles with more upscale clothing lines such as Goodfellow. In April 2018, Target will offer the iconic and beloved Hunter brand of rain boots, backpacks, and other accessories
  • Changed its formats and expanded services. Target has opened up smaller format stores in urban environments and near college campuses while expanding on-demand offerings such curbside pickup and same-day delivery (via its acquisition of Shipt, a membership-based grocery marketplace and same-day delivery service), augmented by digital sales (a model that Walmart has been using already)

In addition, in select New York stores, you can shop at a Target store and have a courier deliver to your store. By the 2018 holiday season, Target will have fully operational network of personal shoppers in major markets, thanks to its acquisition of Shipt. As Bill Smith, CEO and founder of Shipt, said recently,

What sets us apart, and really one of the big reasons we were drawn to Target, is the value we place on delivering quality, personalized experiences to our customers. Our localized network of more than 20,000 shoppers goes above and beyond to make sure our customers are well served . . . For instance, we make sure that the same person who shops for our customers’ items is also the person who delivers those items.

Target’s strategy for growth is clear: satisfying the on-demand consumer with a focus on the physical experience.

 “The Easiest Place in America to Shop”

CEO Brian Cornell said on CNBC’s Squawk Box, “The winning retailers in the future are going to combine a great physical asset and experience with the ease that comes along with the digital interaction . . . We want to make it really easy to shop at Target.” He emphasized that Target seeks to become “The easiest place in America to shop.”

But, here’s the downside to making Target the easiest place in America to shop: these efforts cost money, and if you spend more than Wall Street expects, you get punished in the short run. The reason Target missed on earnings expectations is simple, particularly given the fact that revenue beat expectations: the company’s investments to drive that revenue growth (e.g. higher compensation for team members, store refreshes & new store formats, and M&A activity such as the acquisition of Shipt) came at a cost that outpaced earnings… So, Target saw its shares fall almost 4.5% today, even though in-store and online traffic increased.

No Doom and Gloom

In recent weeks, we’ve seen signs that physical retail stores are shaking off signs of gloom and doom, with both Kohl’s and Macy’s reporting earnings results that exceeded expectations. And Walmart, despite realizing a decline in the growth rate of its online sales, still reported healthy traffic both in-store and online as Target has.

What these retailers have in common is a firm belief that their physical stores are key to their growth, with digital complementing a better, more convenient shopping experience. As Cornell said in a press release, Target will “make 2018 a year of acceleration in the areas that set Target apart — our stores, exclusive brands, and rapidly-growing suite of fulfillment options.”

But Target and Walmart are both paying a price on Wall Street for turning their juggernauts around. For now, Wall Street likes Amazon’s approach of augmenting its digital empire with physical stores.

Which approach will shoppers choose in the long run? Target is willing to pay a short-term price to find out.

Saul Delage

Saul Delage

VP Growth