Target (NYSE:TGT) has been struggling with its growth for some time now due to the edgy retail environment in the U.S. The retailer has reported disappointing results for the past several quarters with its comparable store sales growth barely touching the positive mark. Despite the dismal performance, Target’s online revenue growth has been strong and steady. However, this business is not big enough to have a material impact on the retailer’s overall results.
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Nevertheless, e-commerce channel holds tremendous potential for Target and it makes sense for the retailer to focus on its development. For this purpose, it is working on enhancing its online shopping experience, which will help in better customer service. Alongside, the retailer is revamping its product mix available online and leveraging the power of social media to encourage customers to shop at Target. It is also focusing on the mobile channel as m-commerce sales are growing faster than the overall e-commerce sales. Additionally, the retailer is looking to add its products to different marketplaces such as eBay (NASDAQ:EBAY) to bring in new customers. We believe that effective execution of all these strategies will allow Target to boost its e-commerce business over the long-run.
Our price estimate for Target stands at $74, implying a premium of more than 15% to the market price.
Why Is Online Business Important For Target?
With growing Internet usage and proliferation of smartphones and tablets, online retail sales in the U.S. have grown at a robust pace over the past few years. This trend is likely to continue in the future as Forrester forecast online sales in the U.S. to grow by 13% in 2013 and at 9% compound annual growth rate thereafter until 2017. This will take e-commerce sales to $370 billion by 2017, up from $231 billion in 2012. 
Target has been a part of the boom in online retailing as its own online sales have turned out significantly better than its store sales. In Q1 fiscal 2013, while the retailer’s comparable store sales declined by 0.6%, its online sales rose by 15%. Interestingly, online revenues increased by 20% for weather sensitive products, whose demand was impacted by the prolonged winters. 
Although Target’s e-commerce revenues do not contribute much to its overall sales, it is a vital channel for the company from a long-term perspective.  As the retailer is nearing a saturation point in the U.S., it needs alternate channels to sustain its growth. Currently, Target.com ranks 10th in terms of retailer site availability and performance.  Therefore, we believe that it can serve as valuable growth driver for the company.
Enhancing Online Shopping Experience
For improving its web traffic and conversion rates, Target is utilizing digital technology to create an appealing online and mobile shopping experience. Through rigorous testing, integration, partnerships and by learning ways to increase the speed to market, the retailer is looking to respond to its customers’ needs in a prompt manner. Over the last nine months, Target has hired a number of external leaders to work on developing its Target.com and mobile channel. The company stated that these executives have a strong background as they have worked with players such as Gilt, Amazon (NASDAQ:AMZN), Hayneedle, Gap, Estee Lauder, and several other leading digital companies. 
Moreover, Target is continuously investing in speed, search relevancy, product information and guest checkout to make online shopping more convenient. Although it remains to be seen how these strategies will help Target, the retailer appears to be moving in the right direction. We believe that a compelling shopping experience is the prerequisite of any retailer’s online growth.
Revamping Online Product Portfolio
In addition to enhancing shopping experience, Target is working on its product portfolio to provide its customers with a wide variety of merchandise online. During the last month’s financial community meeting, the company stated that all of its store products including groceries will be viewable online within a month’s time. Though all of them won’t be available to buy, customers will be better informed about the retailer’s offerings. 
Also, Target is offering exclusive products online to drive greater web traffic. In May, it launched Tevolio, an online exclusive and a budget friendly bridal collection, that performed very well. Encouraged by its results, Target plans to expand this line in spring 2014 with the inclusion of shoes, handbags, fine jewelry, and women’s and men’s accessories.  In March this year, the company announced the acquisition of two e-commerce businesses, CHEFS Catalog and Cooking.com. This move was focused on increasing presence in cooking and kitchenware market.  In August, Target acquired DermStore Beauty Group to expand its share in the rapidly evolving online beauty market.  The retailer stated that it will continue to operate these businesses independently to preserve their brand uniqueness. It will also explore ways to leverage its size and reach to make these brands accessible to all its customers. In this holiday season, Target will create brand portals for these business on its main website. 
Leveraging Social Media
These days, a number of retailers are looking to leverage the power of social media due to its strong influence on an enormous user base. A few months back, Target launched a new app “Cartwheel” in partnership with Facebook (NASDAQ:FB) which allows users to log in and gain access to various discounts, which can be redeemed at stores.  The users can choose and customize offers according to what they like and can save more by sharing these offers on the social network. Target stated that response to this app has been very pleasing so far. It currently has close to 2 million users with 82% accessing the website through their mobile devices. Overall, customers have saved more than $10 million since the launch of Cartwheel. The retailer also stated that Cartwheel app is being download at the rate of some hot new gaming app. Also, it’s being repeatedly used at the rate of a great utility app. 
Focus on M-Commerce
M-commerce is emerging as an important shopping channel within the online retail market. In 2012, this channel accounted for only 3% of overall e-commerce sales in the U.S., and this figure expected to touch 8% by 2016.  By combining this with the forecast for online retail sales growth in the U.S., we get a very promising picture for m-commerce.
Target’s own mobile channel, which accounts for about 30% of its direct-to-consumer revenues has been growing at a rapid pace. During Q1 fiscal 2013, this channel registered triple digit growth in revenues and traffic. Since this channel holds tremendous potential for Target, the retailer is looking to promote the use of its mobile apps. Last year, the company enabled the use of free Wi-Fi in all its stores.
A recent Deloitte study suggests that 83% of shoppers use their mobile devices when they are in stores. Smartphone shoppers are 28% more likely to make purchases in stores if they are using that particular retailer’s website or mobile app.  The move of installing free Wi-Fi in all stores worked well for Target as Target.com turned out to be the most visited website in-store.  We believe that the company should maintain a firm focus on its mobile channel to propel its e-commerce growth.
Towards the end of last year, Target entered a partnership with online retailer eBay to use its marketplace to offer Target products. The retailer initially started with 150 SKUs, which it plans to take to 100,000 by this holiday season. Target stated that this strategy has brought in a fresh customer base (predominantly men) and it represents a new revenue stream. It also stated that it will continue to explore other marketplaces, which will allow it to expand its customer base in the U.S. Notes:
- US Online Retail Forecast, 2012 to 2017, Forrester, Mar 13 2013 [↩]
- Target’s Q1 fiscal 2013 earnings transcript, May 22 2013 [↩]
- After Decades Of Toil, Web Sales Remain Small For Many Retailers, The Wall Street Journal, Aug 27 2013 [↩]
- Target’s CEO Hosts Financial Community Meeting Transcript, Nov 2 2013 [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]
- Target to Expand Cooking and Kitchenware Business with Two E-Commerce Acquisitions, Target, Mar 14 2013 [↩]
- Target To Expand Beauty Business Trough Acquisition of DermStore, Target, Aug 6 2013 [↩]
- Introducing Cartwheel: a first-of-its-kind savings program, Target, Mar 8 2013 [↩]
- M-commerce sales via smartphones hit $8 billion in 2012, Internet Retailer, Jan 16 2013 [↩]