What happens when the world’s biggest retailer decides it wants what’s yours? Target is about to find out.
Walmart is moving in fast on the higher-income shoppers who have long been Target Corp’s bread and butter. To withstand the onslaught from the big box titan, Target needs to do more of the things that earned it its “Tarzhay” moniker: cheap chic that can’t be found elsewhere, and collaborations with the world’s leading designers.
Target was a pandemic-era winner, as customers bought its sweatpants and throw pillows and took advantage of its convenient delivery and pick-up from store options. But as inflation climbed, its customers began pruning their shopping lists, crossing off the wants in favor of the needs. It has also suffered from some self-inflicted wounds, including a mountain of unwanted stock in 2022 and a backlash over last year’s LGBTQ Pride collection. It now faces another threat: a newfound energy at Walmart Inc., which is looking to win in Target’s sweet spot.
This couldn’t come at a worst time. Target’s same store sales fell 3.7% in the first quarter. Adjusted earnings per share also slightly missed expectations, and caution on the outlook for those nice-to-have purchases sent the shares down as much as 10% on Wednesday.
Target has long been known as the place to find fashionable, affordable clothing and home furnishings. It is no accident that its customers come in for toothpaste and walk out with a new summer dress. Target generates close to 60% of its sales from items that are not food, personal care or household essentials, according to retail research company GlobalData, compared with just over 40% at Walmart US.
Its bigger rival has noticed. Walmart’s Chief Executive Officer Doug McMillon said last week that the company had “punched below our weight” on clothing and home furnishings “for a really long time, maybe forever.”
That is now changing. Walmart is making its apparel ranges more fashionable with on-trend items such as jumpsuits; turbo-charging its private labels, such as the revived Scoop; and offering 400 million food and non-food products through its online marketplace. And it is showcasing these upgrades in spruced up stores with more convenient delivery options. That’s right out of the Target playbook.
That’s all very appealing to Walmart’s new base of wealthier customers, who historically have been more likely to shop at Target, but traded down as inflation pinched their budgets. Most were originally drawn to Walmart for grocery deals, but they are now putting more non-food items in their carts.
Target, for its part, is also seeking a slice of Walmart’s pie. Earlier this week, it announced that it would cut prices on about 5,000 items, including food and household staples. It said on Wednesday that demand for those frequently-shopped categories had dipped in the first quarter.
But food margins are already thin — about 2-3% according to Jennifer Bartashus, an analyst at Bloomberg Intelligence. Clothing and home furnishings are more profitable, having an operating margin of about 8- 10%, according to Bartashus.
So, Target needs to finds ways to boost spending on higher ticket discretionary items too. To do this, Target should be well, more Target.
With Walmart seeking to boost its fashion credentials, Target needs to ensure its collections are spot on, both stylish and affordable. The company’s strength has always been in its private labels, such as the Cat & Jack childrenswear line. It has 11 brands that generate $1 billion or more in annual sales; overall, its in-house labels, which span non-food, grocery and household essentials, contributed more than $30 billion in sales last year — approaching a third of total revenue. Walmart doesn’t break out its equivalent private label sales.
Building store lines into true brands with their own identities is easier said than done. But Target clearly has the capability, and it must do all it can to stay one step ahead of Walmart.
The company is also known for its collaborations with top designers, such as recent tie-ups with Diane von Furstenberg and tennis brand Prince (the latter is a wise move given the popularity of Pickleball and the “tenniscore” TikTok aesthetic). Keeping similar partnerships coming will help draw in shoppers. It said the DVF collaboration was one of the strongest in years, helping clothing to be bright spot in the quarter.
Target also has other levers to pull, including its Ulta Beauty Inc. store-in-stores, its free click-and-collect from store service and its recently rebooted loyalty program. Like Walmart, it is investing in its locations and will upgrade the vast majority of its almost 2,000 strong fleet over the next decade.
With intensified competition, though, it must ensure store standards are high and avoid overstocking. The latter seems to be moving in the right direction: The retailer’s inventory levels were 7% lower at the end of the first quarter compared with the year earlier.
LGBTQ Pride month will also look different this year, with Target stocking a more limited range in about half of its stores, with locations chosen depending on how well the merchandize has sold in the past. Although this may disappoint some customers, the more cautious approach is probably less risky.
If Target can get back on track and outmaneuver Walmart, it will have a lot going for it, particularly if inflation eases and consumers finally have more money for discretionary purchases. Although the shares are still up by about a third since November, they have lost almost half of their value since the all-time high in 2021.
Sometimes, being the scrappy upstart can spur performance. Indeed, some of Target’s slip-ups smacked of overconfidence. With Walmart flexing its considerable muscles, its unlikely that Target will make that mistake again.
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