Target: Life After the Data Breach

Target.com

As we all know by now Target (NYSE: TGT  )  suffered a data breach, but will it matter down the road? A few years from now, you may shrug and look at it as a short-term hiccup in the retailer's history. It could even be looked at as a long-term positive since Target is now committed to having the safest transaction process in the United States. Is this realistic, or too optimistic? 

Data breach impact
In the fourth quarter of last year, Target was going to deliver positive comps sales (sales at stores open at least one year) until the data breach took place. This led to a 2.5% comps decline for the quarter (year over year). Some customers began to distrust the brand.

Comps only declined 0.3% in the first quarter, and according to Target, customer trust levels are nearing pre-breach levels. This is good news, but Target still doesn't know the overall costs for the data breach (it expects to know by the third quarter), and a lot of the increased traffic has been due to promotions. But for long-term positive traffic trends that won't impact margins, Target must do thing a little differently. 

High-potential initiatives
Target is highly focused on the mobile market, which has been consistently showing improved conversions. Below are some features Target is offering via mobile: 

  • More sorting options (more enjoyable shopping experience)
  • Save for Later (increases conversions)
  • Dynamic customized landing pages (more personalized shopping experiences)
  • Increased visibility for in-store pickup (greatly increases potential for in-store sales)

Target Subscriptions is an initiative you likely haven't heard of yet. That's because it has only been piloted thus far. Early results have been good. Despite limited marketing, Target subscriptions quickly grew to account for more than 15% of online sales (digital represents 2.5% of total sales, with 2/3 of that mobile sales and 1/3 of that online sales). Given this early success, Target will increase its merchandise offerings tenfold while offering a 5% discount on these purchases.

Amazon.com (NASDAQ: AMZN  ) is ranked the No. 1 online retailer in the world by Internet Retailer (measured by sales). In addition to being the highest-ranked retailer on Alexa.com (measured by online traffic). Wal-Mart Stores (NYSE: WMT) comes in at No. 4, and Target lags at No. 18.

While Wal-Mart is trying to catch Amazon, or at least close the gap, Target aims to catch Wal-Mart. The only way Target can achieve this is via inorganic growth. However, it should be noted that Target's digital sales increased more than 30% year over year in the first quarter, demonstrating faster growth than Amazon (20%) and Wal-Mart (27%).

Expanding digital presence
Target has quietly had its share of acquisitions, one of which includes DermStore Beauty Group. (DermStore Beauty Group owns DermStore.com, HairEnvy.com, and Blush.com.) These sites receive significant traffic due to high-quality and relevant content. Target will begin testing the integration of these sites into its weekly ads, and it will start selling related gift cards in July.

That's not the only online integration Target has planned. Target will also integrate site content from Chefs Catalog and Cooking.com into its overall digital experience. Both brands will be promoted on millions of Target.com orders.

Additionally, Target has invested in Cosmic Cart. Essentially, customers will now have an opportunity to purchase Target items on other sites -- including social media -- without having to be redirected to Target.com. This should increase sales. 

The bottom line
Target is making many moves to increase traffic and sales. Promotions are a big theme, but so is e-commerce. If Target can gain share from Amazon and Wal-Mart in the e-commerce market in a sustainable way, it would be a major positive, not just for the market share gains but because e-commerce sales have lower costs, which would help increase profitability. That said, if Target accomplishes this goal, it will still take a while to play out. Target should only be considered by long-term investors with some risk tolerance. 

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