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Target Joins Walmart in Flexing Big-Box Muscle

Target Joins Walmart in Flexing Big-Box Muscle

(Bloomberg Opinion) -- Things may be looking pretty gloomy at the mall after the latest batch of department-store earnings. But the giants of the big-box retail world are roaring.

Target Corp. reported on Wednesday that comparable sales rose a robust 4.8 percent in the first quarter from a year earlier, an upbeat result that exceeded analysts’ estimates and showed that the chain held its own in a quarter when key rival Walmart Inc. also delivered strong growth in traffic and comparable sales.

Target Joins Walmart in Flexing Big-Box Muscle

The results, at least initially, were strong enough to make investors put their fears about tariff hikes on hold. Shares were up nearly 8 percent in early trading.

The components of Target’s sales growth in the quarter show that it is transforming its business in a healthy way. The company’s e-commerce sales surged 42 percent from a year earlier in the quarter, thanks in part to same-day services such as click-and-collect and delivery via Shipt, which it acquired in 2017. These digital-centric same-day services accounted for 25 percent of overall comparable sales growth in the period, proof that they’re much more than nice-to-have offerings that are helping around the edges. Rather, these initiatives are paying off in the form of meaningful top line growth.

It’s also impressive that Target used its stores to fulfill 80 percent of digital-order volume in the quarter. The case that every legacy brick-and-mortar retailer is trying to make to investors is that its stores, if utilized in a smart way, can be an advantage in the e-commerce wars. This is the kind of data point that makes that case very strongly.

All of the work Target has done to use stores as part of its e-commerce ecosystem should serve it well at a moment when competitors Amazon.com Inc. and Walmart have recently pledged to offer free one-day shipping on certain purchases. Michael Lasser, a retail analyst at UBS, has estimated a move to a one-day shipping pledge would only crimp Target’s gross margin by about 10 basis points. And perhaps the traction of its same-day options mean it can and should simply focus on expanding and increasing uptake of those, rather than joining the one-day fray. 

After such a long streak of strong earnings from Target, I remain puzzled as to why its shares trade at such a discount to Walmart’s. This quite good first-quarter report, after all, follows a fiscal 2018 in which Target had its best comparable sales growth since 2005.

Target Joins Walmart in Flexing Big-Box Muscle

Be that as it may, the strong results at both Target and Walmart give me some idea of where Kohl’s Corp. and J.C. Penney Co.’s sales disappeared to in the quarter. In its earnings press release last week, Walmart called out, as usual, its online grocery business as contributing significantly to e-commerce growth. But it also highlighted home and fashion as key drivers of its digital business, two areas where it has launched new brands at price points not so different from those at Kohl’s and J.C. Penney. And Target’s stable of well-priced private home goods and apparel just keeps getting stronger and more differentiated.

The specter of increased tariffs is serious for the whole retail industry in the year ahead. But Walmart, and now Target, too, have shown themselves to be facing that threat from a position of strength. 

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.

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