In just a few years, Target (NYSE:TGT) has launched over 20 private-label brands across nearly all of its product categories. This has worked for the company, giving it what CEO Brian Cornell called a "differentiated shopping experience."
Now, the company has launched a line of inexpensive toiletries and cosmetic items designed to keep customers away from drug stores and dollar store rivals like Dollar General. That's part of a strategy to increase sales from existing customers and give them less reason to shop anywhere else. It's also part of a longer-term strategy to increase digital sales by having items that can't be purchased elsewhere.
A full transcript follows the video.
This video was recorded on Oct. 9, 2018.
Vincent Shen: The last initiative I wanted to discuss was the growth of Target's private label offerings. I know this is what originally attracted you to update listeners on the company. What's going on with the owned exclusive brands?
Dan Kline: If you've been to a Target, you may have noticed that it's no longer just a collection of merchandise. It is a very carefully curated set of different brands. Admittedly, some of the brands have fake-sounding names, especially the men's shirts brands. I believe I'm wearing one right now. Goodfellow & Co is the brand they use. Again, that sounds like something you and I made up for a placeholder. But they also have partnerships with Chip and Joanna Gaines on some of their home stuff.
They really have created what Brian Cornell called a differentiated shopping experience. That goes to everything. They have multiple lines. If you look at shampoos and cleaners, they have their Up&Up line. That's competing with the name brands full size. The reason I pitched this is, they just introduced a line of smaller, I don't want to say lower-end, but more single-use, not exactly travel size, but much cheaper, toiletries and other items like that, toilet paper, toothpaste, that type of stuff, designed to keep you out of Dollar General or Aldi, places that people were going when they just needed a little bit of something. So, they really have something for everyone, and they've been very clever about how they've done it.
Shen: This latest one, it's called Smartly. It covers some of those consumer staples that you mentioned, Dan. A lot of these items are going to be priced under $2. Management pretty much said outright that they want to take a swing at the discount retailers like dollar store chains, and keep people out of drugstores, too, which obviously have a lot of their own generic private label brand offerings.
All in all, in terms of these owned exclusive brands from Target, the company's launched four of them in the second quarter alone, about 20 in the last two years. Clearly, that effort, the investment in these brands, is picking up.
You take a step back to consider some of the bigger-picture considerations for Target shareholders, maybe investors who are now intrigued. A reality check that I have, that's what I'll call it, is that even with a lot of the growth that we've seen, for example, in e-commerce, we spent a few minutes talking about that, and the innovation in the fulfillment options that we discussed, only about $4 billion of their sales came from digital last year, or about 5.5% of the top line. That number will be higher in 2018, of course, given some of the growth that they've been putting up. But it's still only a sliver of Target's $74 billion in annual revenue.
All of those additional fulfillment expenses, those promotions from the first half of 2018, they're putting downward pressure on margins. It's not too severe. The guidance for full-year 2018, operating income margin is to decline 30-40 basis points. And while e-commerce does bring profitability down, this is where the private labels come in, Target's able to offset some of those costs with the growing popularity of its private labels, which generally carry a better margin profile.
Kline: I think we're also in the very early days of private labels. Let's say I'm wearing Target pants. I don't know what the pants brand would be, let's call it Pantsly. You go in and you find your pants. Once you've done it in the store, you then unlock the possibility of buying again online. You'll notice about all of these Target brands, whether it's the toiletries or the clothes, everything is very, very smartly packaged. They did a line of very low-end, under $10 mostly, electronics, things like chargers and cables and stuff that's hard to figure out. It's in such clean, smart packaging, that once you buy it once, it becomes very easy to trust it and buy again. I think that's going to happen with clothes. I think that's going to happen with their food lines, with their sundry lines. And that will drive sales online, once people have had this experience in the stores.
Shen: I definitely think there's a great opportunity with the private labels. I'm curious what you think about this take. Another Fool, Tim Green, he had a pretty interesting piece cautioning that going too far with private labels, and in the process cutting out a lot of well-known national brands, can end up hurting Target if they take it too far. The examples that he gave were for Kohl's and also J.C. Penney. What do you think?
Kline: Here's the thing. I worry about it a little bit. I used to buy the generic Champion sportswear that Target is phasing out in favor of its own brands. If I'm looking for running shorts or a bathing suit, I don't necessarily need something as hip as Target is trying to go. It might surprise the listeners, but I'm not super hip in the all-black outfits here. But, if you go look at shampoo, they still have all the major brands. They still have anything you'd want in other areas. So, yeah, I think on clothing, and maybe on the home stuff, they might have gone a little too far. They expose themselves a bit to a brand that they've created falling out of fashion, and they no longer have the generic that they used to. But as long as they keep innovating and keep rolling out new brands, I think they should be able to meet all those different needs.
Daniel B. Kline has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.