Target’s Digital Aggression Is Likely to Pay Off

Target.com

We're now entering the era of digital retail. This doesn't just mean online sales, it means mobile sales as well. And if you think this trend is old, then you're mistaken. For instance, the digital sales of Target (TGT -0.32%) only represent 2.5% of the company's total sales. This might seem like a negative, but it's not; it's a positive. Here's why. 

Increased focus
Target is now highly focused on digital sales. Actually, it has pinned digital sales as its key growth driver going forward, and it wants to be a leading omni-channel retailer in the future. It has even hired some key people to accomplish this goal.

Key people
Target doesn't often hire from the outside, but it's changing its policy because it needs to make a bigger splash in the digital space. 

Jim Fisher is now overseeing Target's technical infrastructure and operations, as well as its technology services. He was most recently the Senior Vice President of First Data Corp., and he brings 35 years of experience between Home Depot, Macy's, and IBM.

Alan Wizemann is now the Vice President of Target.com and the company's mobile product teams. He's extremely innovative. For example, he founded ShopIgniter, Event Space, Band Buzz, and Loft Rent LLC. ShopIgniter is the most important of these; it is a social commerce and marketing platform used by 20 Fortune 500 companies.

David Weissman is now the President of Derm Store, an online beauty and skin-care company that Target acquired last year. Weissman was previously the Executive Vice President of e-commerce and Omni-channel at BCBG Max Azria Group.

It sounds like Target is hand-picking its digital sales drivers. If experience is the key to success (it certainly plays a huge role in it), then Target could have a bright digital future ahead of it. And if only 2.5% of total sales come from digital right now, then imagine what the future could hold for the company. But headwinds exist. 

Comparison shopping
Target is offering many promotions to drive traffic and sales in its physical stores and online. It needs to do this because of the data breach and a hesitant consumer. One promotion gives free online shipping to REDcard members. This is great news for REDcard members and Target's top-line growth, but that's not going to help its margins. While the aforementioned hires are highly innovative and experienced, we still don't know if they're capable of delivering margin expansion.

On top of that, Target must compete with Wal-Mart Stores (WMT 0.99%), Amazon, and Costco Wholesale (COST 0.20%) in the digital retail space. Wal-Mart and Costco might not be seen as digital retailers now, but that will change. It just might take a little longer for Costco.

The good news for Costco is that its target demographic hasn't been hit as hard as that of Wal-Mart, which gives Costco more time to grow its digital operations without much of a hit to its overall performance.

The bad news is that Costco CFO Richard Galanti stated on the company's most recent conference call that it wants to figure out how to lose fewer sales to Amazon. Not very comforting. And while Costco is one of the best-performing retailers in the world right now, when asked questions on the conference call, Galanti would often respond with: "I don't have those numbers in front of me." Once again, not comforting. 

As far as Wal-Mart goes, the company is always sharp on its conference calls, and its digital sales increased 27% in the first quarter year over year. That might not be as quick as the pace of Target, which delivered a 30% increase in its most recent quarter, but Wal-Mart isn't contending with the impact of a data breach and poor performance in Canada. Additionally, Wal-Mart has a larger presence in the high-growth-potential small-box store space.

The bottom line
You can look at the digital retail story from many different angles. Costco is ahead of its peers in overall terms right now on near-term potential thanks to its highly effective business model, but it's behind in the digital space. And while Wal-Mart is ahead of Target in the digital space, Target is being more aggressive with its innovation and hiring.

The most likely outcome is that well down the road, Target will accomplish its goal and become one of the largest and most efficient digital retailers in the world -- thanks to the aforementioned innovation and leadership. Unfortunately, for now, it's going to have to deal with many headwinds, which means investors might have to wait years to reap the benefits of this long-term trend change. If you're looking for more immediate results, then you might want to consider Costco first, but this would have very little to do with digital growth.