Target Embraces Change at Its Stores and Online

Target (TGT -0.70%) has begun a major project to remodel about half of its stores by 2020. That effort is well under way, and it involves customizing each store in order for it to function well in the market it specifically serves.

That involves everything from moving merchandise around to even adding a second entrance in some locations. Over 300 stores will be remodeled in 2018, and roughly half all Target locations will be redone by 2020. And though it's early in the process, the company has seen positive comparable-store sales in the stores where the remodels are complete. In addition, the remodels have helped the company use its stores to fulfill online orders and create a true omnichannel shopping experience.

A full transcript follows the video.

This video was recorded on Oct. 9, 2018.

Vincent Shen: The next thing I'd like to talk a little bit about is existing locations. We mentioned the major remodeling project that is currently in process. Over 300 stores are expected to get a facelift in 2018. Longer-term, the goal is to remodel 1,100 locations by 2020. That would cover more than half of the company's total store base. This is the COO Mulligan, he said about the remodeling efforts, "Specifically consistent with our plan, we continue to see traffic-driven incremental sales lifts of 2-4% in our remodeled stores following completion of the remodel. While the data is limited, we're seeing some early indications that remodeled stores continue to outcomp other stores beyond the first year after the remodel." Management said that at one point in time in July, there were 258 stores that were in the middle of the remodeling process. You have to imagine that'll negatively affect the customer experience at those stores in the near term.

Dan Kline: I don't know that it does. They do a really good job. They remodeled fully the store near us in Davenport, Florida, near Disney World. As we've talked about, we have a little place there. They made it really exciting. There were covered boxes in the parking lot saying, "Big things are happening soon." It wasn't very distracting in the store. They did a very good job closing off certain areas and moving merchandise around. At no point that I feel like "Wow, this is a construction zone." There was always a little bit of, "Ooh, what are they going to uncover next? Are they adding this kind of store?"

What's important to know about the remodel is, these aren't cookie-cutter remodels. The remodel here in West Palm Beach is very different from the remodel in Davenport. When I walk into the store near Disney, the first thing you see is towels and disposable swim items and things that someone on vacation is most likely to need. When I walk in here, you get the on-sale household goods, and maybe bottled water, or maybe bathing suits, whatever it is. It's based on the place where you live vs. the place where most people there are just visiting for a short amount of time. They put a lot of thought into how they arrange each store.

Shen: That's good to know. I didn't mean that as a knock on this process. I think it's a risk that's worth taking. Management may have confirmed that there is a bit of a negative headwind from having so many stores going through the remodeling process at once. But ultimately, this is a near-term hiccup that gives the company a much better long-term focus and runway. I prefer to see that from management, frankly.

Related to the remodeling project, a big part of that is their e-commerce effort. Target's brick and mortar locations, they're doubling more and more as fulfillment centers. They said that two-thirds of their 41% online sales growth in the second quarter was fulfilled from stores, which is pretty big. What do you think?

Kline: I think that's also an important move to make when it comes to inventory flow. Yes, you can save money by, if I order something here in West Palm Beach, and they ship it from West Palm Beach, that's cheaper than if they ship it from a fulfillment center in Detroit. But more importantly, if I'm ordering, I don't know, let's call it bedsheets, and they sell 23% more bedsheets because they fulfill online orders, they'll be able to stock more colors, have more product move through. Routing things that way is good for the bottom line, but it's also good for the in-store customer. It makes it easier to get stuff. Even if they're out of stock, they have more capability to bring the order in, and the capacity to get it to you. It used to be chaos. When you ordered something at Target to pick up in the store, nobody knew how to handle that. That was as recently as two years ago, when we first moved down here. My wife ordered a bunch of stuff and I had to go pick it up. It was not fun. Now, that process is super simple, because it happens 100X a day.

Shen: I want to keep talking about that kind of fulfillment experience. Customers really seem to have their pick of the litter now when it comes to fulfillment options from Target. I was just looking through some of the options that they talked through in the earnings call. It is pretty crazy. They have Shipt, which the company acquired in late 2017. That brings same-day delivery to major metro markets. Updating on that purchase, management said that Shipt is now live in more than 160 markets. It covers 1,100 Target stores. It's just $7 for the service. Membership has more than tripled. The number of orders, the revenue, and the gross merchandise volume flowing through Shipt, they're all 2-3X higher year over year. Pretty impressive.

Another one, an interesting that I'd like to get your thoughts on, Dan, is Drive Up. Drive Up is like Walmart's curbside grocery pick up, but I believe Target makes pretty much all the products in its store eligible for this service. They expanded that from 50 to 800 locations as of the second quarter. They expect to grow that number to 1,000 stores for the holiday shopping season. Walmart, their curbside grocery pick up was something we talked about as a cool idea that was driving traffic and helping Walmart at the time. It makes sense that Target here is going to offer their version maybe a little better.

Kline: Yeah. It's just about offering customers whatever they want. I go into Target a lot. But I can envision a day where I've got a hundred errands to do, and our Target, you actually have to park and then go up an escalator. It's an elevated Target. So I can see the possibility, where just rolling up, my order is ready, it's already paid for, it's thrown in the back of the car, that might work. I tend to be an Instacart shopper, in terms of delivery. But there's no reason I might not place a Target delivery order, especially, we're in hurricane season now, so if I decide I need to stock up, I need heavy water, I need other things like that -- it's all about giving the customer choices.

I think what will happen is, in each market, it'll shake out what people want. They might find that in a driving market, pickup is important, but delivery isn't. Maybe in a city market, lower quantities for delivery are really important. It's going to be different everywhere. I imagine they'll get rid of and add options based on the feedback they see.

Shen: Here's one more, it seems to be a little bit newer, it's called delivery from store. This is another interesting option, where you can shop at a Target, at the store. Then, during check out, you can choose to have your purchases shipped to your office or your home later that day. It's available in 58 stores across five markets. The notable thing here is that the average basket size for this option management, management said, was about $200 or more. This is the highest of all the options Target has rolled out.

Kline: And there's a reason for that. Brian Cornell has talked about this. He was talking about being in New York, and that when you walk into a store in New York, you may need a TV, but you have no ability to leave with a 50-inch television. You can't walk down the street carrying that with you. Or, a vacuum cleaner, anything that's not going to fit in your little rolling shopping cart that people in cities use.

Shen: The last two related things I'll mention are restock and the perks for Target's REDcard holders. The restock service offers next-day delivery for things like packaged foods, staple items, with a delivery fee of just $2.99. That service went nationwide in May. It's actually free for REDcard holders. That's Target's branded credit card. Same thing for REDcard holders, two-day shipping for online orders is free for them. Non-card holders have to spend $35 or more. I know that right now, Target is testing a new loyalty program. But REDcard holders made up almost one-quarter of sales last year. Those kinds of perks can definitely contribute to greater customer loyalty. I think it's something that makes sense to add on as a benefit for the people who are loyal enough, shop at Target enough to pick up the card.