Target (NYSE:TGT) has, in the short term, stabilized its business.
The company has delivered a better-than-expected 2017 so far, reporting a comparable sales increase of 1.3% in Q2 and earnings per share (EPS) from continuing operations of $1.22, a 14.2% year-over-year increase. Perhaps most importantly, the chain has advanced its turnaround plan, remodeling some stores, and working toward integrating its website with its brick-and-mortar stores.
"We continue to focus on our long-term strategy, as we work to transform every part of our business and build an even better Target that will thrive in this new era in retail," said CEO Brian Cornell in the Q2 earnings release. "While our recent results are encouraging, we will continue to plan prudently as we invest in building our brands, our digital channel, the value we provide our guests, and elevating service levels in our stores."
The problem the chain faces --and it's a big one -- is that it competes with Wal-Mart (NYSE:WMT) and Amazon.com (NASDAQ:AMZN). Those two companies are engaged in a technology arms race, and it's going to be expensive for Target to keep up.
What is Target facing?
For years, Amazon has taken market share from traditional stores by working relentlessly to improve its delivery service and the shopping experience for its customers. This push has included making two-day delivery a standard while pushing to create even faster methods of getting products into consumers' hands.
Amazon has set a standard of digital service, but it has not rested on those laurels. Wal-Mart was late in responding, but it recognized the threat to its survival when it spent $3.3 billion buying Jet.com, mostly to acquire Jet's leadership team, led by serial entrepreneur Marc Lore.
That investment, however, was only the beginning, as it has moved quickly to further integrate its stores and digital operations. That includes testing automatic pickup towers in some stores, adding "Easy Reorder" on Walmart.com allowing customers to see in-store and online purchases they have bought most often, and upgrading the technology that supports their supply chain.
"We have tests going on with digital endless aisle shopping, robotics, and image analytics to scan aisles for outs and we're using machine learning to assist our merchants with pricing," said CEO Doug McMillon during the chain's August post-earnings release call.
It's an arms race where price seems to matter little. Amazon is spending tens of millions -- maybe hundreds of millions -- pursuing drone delivery even though it may never be able to get it legalized for widespread use in the U.S. In fact, the online retailer has shown it will sacrifice margin and profit to build its business, and Wal-Mart has shown it will open its pockets to compete.
Target is different
Right now, Target's efforts on the technology side are to catch up to the current standard. The company understands that its stores give it an exploitable edge over pure-digital retailers, and it has been following Wal-Mart's lead in creating an omnichannel shopping experience.
Target has also been following Amazon's lead in creating house brands to give consumers a distinct reason to come to its stores. That has been a strong part of the company's turnaround, and having exclusive product lines gives the chain some insurance against its rivals' ongoing technical advances.
The challenge for Target is that it's not innovating in technology. So far it has survived, even slightly thrived, by following along, but its supply chain and delivery capabilities lag well behind Amazon's and somewhat behind Wal-Mart's.
The chain has taken a step to correct that, buying Grand Junction, which it described as a "transportation technology company" in a press release. The acquisition will "improve and expand Target's delivery capabilities ... [and] accelerate Target's investments and ongoing efforts to transform its supply chain," according to Target Chief Logistics Officer Arthur Valdez.
Be wary, not afraid
Target may succeed by having good-enough technology with differentiated merchandise, and well-designed stores. It runs the risk, however, that Amazon and Wal-Mart will advance their technological edges in ways it can't quickly follow.
That could be having Amazon's drones cut into people's trips to stores, or seeing Wal-Mart come up with its own near-instant-delivery method. It could also be an innovation that neither company has spoken about yet.
Amazon and Wal-Mart are working to innovate, while Target is just keeping up. That creates risk for the company that it will either lose customers to an innovation it can't easily copy or that it will have to come up with significant, unexpected capital expenses to keep pace.