Target (NYSE:TGT), one of the country's largest retailers, has made major changes to its operations since launching a turnaround effort in early 2017. The company has revamped many of its stores, better curated its merchandise, and improved its supply chain.
Those changes are beginning to pay dividends as the company delivered outstanding comparable sales growth, improved foot traffic, and accelerating e-commerce sales during the second quarter. Check out the clip below for more details of Target's bullish report.
A full transcript follows the video.
This video was recorded on Oct. 9, 2018.
Vincent Shen: I wanted to bring you on the show today to talk Target. Thank you for bringing the company back on my radar, by the way! Frankly, if you'd have told me that at the beginning of 2018, Target would end up being in the top 50 best-performing stocks in the S&P 500 this year, I don't think I would have believed you, frankly. But here we are in October. Target is indeed in the top 10% of gainers in that index, with shares up 31% year to date.
The last couple of times Target has come up on this show, we talked about the turnaround plan that management launched in early 2017, there were some encouraging initial results from that effort as of the late summer last year. Think about things like smaller store formats, remodeling existing locations, there's digital growth. These are all themes from last show. But most importantly, management has really wanted to take back market share, and they've become more willing to compete on price in order to do so, and also think out of the box. After the second quarter results Target released back in August, I think a lot of even the biggest skeptics have to acknowledge that the chain is gaining some momentum.
We're going to cover a lot of different investments that Target's leadership has been making to contribute to the strong results, but I'll let you start, Dan. What kind of stuff has impressed you the most?
Dan Kline: Really, it's that Target could have just made some minor changes. They could have improved delivery, spruced up the stores, tweaked the merchandise, kind of just stuck with what was already sort of working. It wasn't the disaster that some of these retailers are. Instead, they really blew everything up. They're not done with the remodels, they're about a third of the way through. If you go into a remodeled target, they've changed everything -- the way that you flow through the store, the way merchandise is. If you're in a more urban location, things like snacks are in the front, there's multiple entrances. They took something, and instead of just going, "OK, how do we get it a little bit better?" they really took a big risk. They changed a lot of their merchandise. And, they made all the changes that you don't see. They invested a lot of money in supply chain and making sure they have the right merchandise in their stores. And that's really all paying off. They put up the best comp sales numbers they've had in I want to say eight, nine years. Their traffic was up some 6%. It's really been a turnaround that all came together in the last quarter or two.
Shen: I will jump into those numbers a little bit. We're talking about foot traffic growth here of 6.4%. That's the highest level of growth recorded since 2008. On top of that, the year over year comparable sales growth was 6.5%, the highest level since 2005. Like you said, pretty impressive.
Breaking that down, the physical stores contributed 4.9% of that comps boost. With the remaining 1.5% or so coming from e-commerce. E-commerce specifically, digital growth came in at 41%, which is an acceleration from both the first quarter of this year and the prior-year quarter. Both of those came in closer to 30%.
It does seem like CEO Brian Cornell and the rest of the leadership team are taking a more holistic approach to the turnaround that they've implemented. They're still experimenting with a lot of things, like the smaller format stores. 12 of them were opened in the first half of 2018. COO John Mulligan, he said during the last earnings call, "These locations deliver high sales productivity along with gross margin rates above the company average. We continue to see strong growth as these stores mature. At the end of the second quarter, we are operating 26 mature small format stores. On average, this group saw high single digit comp growth during the quarter." Again, feeding into that, though at this point, still a very small base.
Kline: Yeah. When you look at it, on the back-end side, they made all the same moves Walmart did. You can order online, pick up in store, there's multiple delivery options. It's really about giving the customers what they want and where they want it and how they want it. If you look at their website, it's not a total overhaul, but they really dug in on taking steps out of the process, automating things like subscription, just making it very, very easy to shop there. You have to do that when your competitor is Amazon, which is about the easiest place to shop there is.
Shen: On the supply chain side, I was looking for some more specific detail and guidance, in terms of what they're doing there. It seems, as much as I could glean from the management comments, they're trying to handle a lot of the digital fulfillment from the growth in that channel, of course, but they're also trying to improve things like the in-store functions, like how they offload inventory from the trucks, some of the shelf-stocking process, and also how they staff employees in different departments of the store. Overall, it seems they're really trying to focus on improving the guest experience, to give better service, have fewer out of stock items.
Kline: It's a work in progress. I am a three or four times a week Target visitor, sometimes because it's too hot here to take a walk outside, so I'll use Target as my indoor walking space. I know that makes me sound 1,000 years old. They've done better in that, on the big-ticket items, you won't find them running out of, say, one flavor of cereal from a popular brand. Where they still struggle a bit is on some of the smaller companies. They stock a type of canned coffee I like. They sort of run out of it before they bring it all back in. So, there's absolutely still little hiccups in it, but it's gotten much better. And, your ability to walk up to an associate and say, "Hey, I usually buy this. How do I order it online? How do I get it sent here to the store?" The level of training, in my personal experience, is very high for the individual associate to be able to help you with that.
Shen: Management has been talking a lot about improvements to training to help customers with issues like what you just mentioned.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel B. Kline has no position in any of the stocks mentioned. Vincent Shen owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.