(Bloomberg Opinion) -- Target Corp. has had an impressive run of growth lately, reporting Tuesday that its comparable sales in the latest year increased the most since 2005. Amid that spurt, though, investors have fretted at times about how the big-box retailer’s transformation efforts have weighed on profitability.
Those doubters should be soothed by what they heard from Target executives in a Tuesday investor presentation, which made clear that the retailer’s gross margin has been dented for all the right reasons, and that it has a solid vision for building its e-commerce business in a healthy way.
CFO Cathy Smith said half of the 40-basis point decline in full-year gross margin was driven by the mix of products sold, with a heavier component now comprised of baby products and toys. This should be shocking to no one, as onetime Toys R Us and Babies R Us customers were up for grabs after those chains’ liquidation. Given that Target’s comparable sales were up 15 percent in 2018 in its baby and toy segments, it apparently did a good job filling the void. In fact, I’d argue Target would have failed if it didn’t get a gusher of business from the disappearance of two big competitors in that space.
Another reason for the decline in gross margin was slashing prices on everyday items, an essential undertaking to compete effectively with Walmart Inc. and Amazon.com Inc. A third was an increase in digital-fulfillment costs, reflecting a surge in online orders and initiatives such as promising free two-day shipping with no minimum purchase during the holiday season. None of these give me serious concerns about Target’s long-term future, especially given the retailer’s plans for managing customers’ increased embrace of online shopping in the years ahead.
The retailer has aggressively rolled out options such as drive-up and in-store pickup that eliminate the need to for it to foot the bill for last-mile delivery. If Target can get more consumers to choose these offerings – and the high rates they are seeing in repeat use suggests they can – that will help with profitability.
Also, in the fourth quarter, the busiest of the year, Target managed to fulfill three of every four online orders from its stores, a volume that COO John Mulligan said means stores are effectively doing the work of 14 fulfillment centers. And the brick-and-mortar business doesn’t appear to be suffering from having some workers focused on serving online customers. In-store sales per square foot grew last year at Target, suggesting the stores can effectively serve dual purposes.
Meanwhile, Target offered an upbeat outlook for the year ahead that included a low- to mid-single digit increase in comparable sales. Fourth-quarter sales gains by that measure of 5.3 percent over a year earlier made that look plenty manageable. A new leader for its food-and-beverage business should help maintain Target’s momentum, as should its suite of new private-label brands.
Target just rolled out new lines in the lingerie and sleepwear category – a deft move at a time when Victoria’s Secret is on the skids and closing dozens of locations. I wouldn’t be surprised to see more private brands from Target this year in categories such as beauty, personal care and food.
Importantly, Target said it also expects mid-single digit gains in operating income for the year, which, taken together with its upbeat earnings report and rosy sales outlook for the year, should reassure any still-skittish investors that it has a handle on both the top and bottom lines.
To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net
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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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