Key Takeaways from Target's Latest Results

Credit is given to more fulfillment options and everyday value

Author: Krista Garcia

May 23, 2018

Target has been making big investments in delivery and fulfillment, as well as remodeling stores and introducing more private labels. These initiatives might not have all paid off yet, but according to Q1 earnings it looks like the retailer is on the right track.

On Wednesday, Target reported that Q1 2018 sales hit $16.56 billion, up 3.5% over Q1 2017, and digital sales grew 28%, a larger increase than the same time period last year (21%). In-store was also positive as foot traffic was up 3.7%, the strongest growth in 10 years. 

"Despite Target's Q1 performance coming in below expectation, the 3.7% rise in in-store shoppers—its strongest performance in over a decade—indicates that brick and mortar is alive and well," said Brennan Wilkie, senior vice president of customer experience strategy at InMoment, in an email. "So while there may be short-term concern, the unique customer experience of 'going on a Target run' remains valuable and memorable for consumers and will be difficult for competitors to duplicate."

The competition for fast, cheap delivery is fierce and Amazon keeps raising the bar. "For a retailer like Target that's competed on price for so long, there's no way they can continue following this strategy and win against Amazon," said Ed Kennedy, senior director of commerce at Episerver. "The good news is that we've seen Target implement a variety of innovations over the last few quarters to differentiate themselves in other ways."

One of Target's responses has been investing heavily in omnichannel initiatives. Target acquired startup Shipt in late 2017 and launched same-day delivery in 700 stores via Shipt in Q1 2018. The retailer also introduced drive-up pickup to 250 stores and rolled out "from store, same-day delivery" via a third-party courier service to 55 stores in more dense urban locations (NYC; Boston; Chicago; Washington, DC; and San Francisco). 

During the company's recent earnings call, executive vice president and COO John Mulligan reported that the average basket size for Shipt orders was almost double the average basket size, which is potentially offsetting the delivery costs. "As we lower the actual cost to deliver, the team continues to focus on driving the average basket size to lower the cost per unit and improve the unit economics across all of our digital business," he said.

eMarketer categorizes Target as a discount and variety store along with Walmart, though it competes across multiple categories, including grocery and apparel. Home and beauty were called out in the call as strong performers in Q1. 

Mark Tritton, Target's executive vice president and CMO, explained the retailer's perceived strengths based on customer surveys. "We're receiving higher scores on convenience, reflecting the benefit of our work on fulfillment. We're also seeing rising scores on multiple measures of value, including our everyday pricing, having great sales, and delivering a great deal," he said. 

Here are a few additional insights into how consumers view Target.

In a January 2018 survey of US internet users by Morning Consult, most respondents preferred Walmart to Target (56% vs. 26%). Target had a slight female bent and while 48% of respondents 18 to 29 preferred Walmart, 31% of respondents in that cohort gave the nod to Target—its highest rating among all age groups. 

Apparel and accessories are popular. In a January 2018 Coresight Research survey, Target was neck and neck with Amazon for clothing or footwear purchases (37.3% vs. 37.4%) among US internet users in the past year. And Target was the top retailer among respondents ages 18 to 29, cited by 44%, mirroring findings from Morning Consult.

Shoppers buy groceries in-store. Per a March 2018 Coresight Research survey, 37.0% of US internet users had shopped in-store for groceries at Target in the past year, second only to Walmart (60.8%). There were far fewer digital grocery buyers overall (23.1%) per this study, and Walmart also ranked first among digital grocery buyers (25.5%). Target came in third (6.9%), just behind traditional supermarkets like Kroger/Harris Teeter/Fred Meyer (8.1%). 

Variety is key. Target’s high-low reputation was reflected in a May 2018 YouGov survey, which categorized it (and other discounters) as a department store. It ranked No. 1 in department stores and scored high marks for lowest prices (66%), on par with Walmart (66%) and just below Dollar Tree (67%). Yet it also placed first for those who described themselves as having expensive taste (79%).

Designer collaborations, like with British rain boot brand Hunter in Q1, contribute to Target's on-trend perception. Target also hasn’t been immune to the move toward experiential retail. This week, the retailer announced a children’s apparel partnership with the Museum of Ice Cream. Target will carry seven new premium ice cream flavors and will sponsor The Pint Shop, a NYC-based interactive store that offers exclusive tastings and life-size ice cream installations.