Will Target's (TGT) Strategies Help Counter Competition?

With digital transformation in shopping and consumers splurging online, store and mall traffic has been hit hard. As a result, most retailers including big-box ones are struggling to compete with e-Commerce channels. Nevertheless, this transition in buying pattern has persuaded retailers to come up with innovative ways to market products, and Target Corp. TGT is no exception to the trend.

This general merchandise retailer is trying all means to rapidly adapt to the changes in the retail ecosystem that just witnessed Whole Foods Market’s buyout by Amazon.com Inc. AMZN. This clearly indicates that technology is going to play a pivotal role going forward.

Let’s Take a Look at the Stock

We believe that Target’s initiatives such as the development of omni-channel capacities, diversification and localization of assortments along with emphasis on flexible format stores, bode well. The company intends to deploy resources to significantly develop online platform as well as store facilities to make shopping more convenient for customers. These endeavors have helped the stock to outperform the industry in the past six months. The stock increased 4.4% against the industry’s decline of 3.1%.

We observed that comparable digital channel sales surged 32% during the second quarter of fiscal 2017 and added 1.1 percentage points to comparable sales. The company intends to launch 12 new brands across its signature categories. It has also rolled out Target Restock program that allows customers to restock their shipping box with essential items online and get them delivered at door steps by the next business day for a nominal charge.

The company plans to expand merchandise assortments with special emphasis on Style, Baby, Kids, and Wellness categories that are performing well. Target has also adopted a cost reduction strategy, including rationalization of supply chain, technology and process improvements. Recently, it waged war against other retail big-wigs such as Amazon, Wal-Mart Stores, Inc. WMT and Costco Wholesale Corp. COST by aggressively cutting prices on a range of items.

Analysts believe that the move might help improve the top-line performance but will definitely hurt margins. We noted that in both the first and second quarters of fiscal 2017 gross margin contracted 40 basis points to 30.5%. Operating margin also shriveled 80 basis points and 90 basis points to 7.4% and 6.8%, respectively. The retail sector is already reeling under pricing pressure and Target’s recent strategy may not be well perceived by investors.

Currently, Target carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Amazon.com, Inc. (AMZN): Free Stock Analysis Report
 
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