How Target’s E-Commerce Initiatives Will Impact Its Financials

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Target (NYSE: TGT) continues to look to keep pace with Wal-Mart (NYSE:WMT) in the e-commerce space, no easy feat given Wal-Mart’s acquisition of Jet.com, which transformed the company’s online operations and brought in a new team of e-commerce executives. Wal-Mart has been making big moves in the e-commerce space, between acquisitions, and innovative online shopping initiatives (such as the associate delivery program, pickup discounts etc) in order to fend off growing competition from online retailers such as Amazon (NASDAQ:AMZN). And while Target’s e-commerce presence is strong, it is going to take a lot of effort in order to keep up with Wal-Mart (not to mention Amazon). Below we discuss Target’s e-commerce initiatives, as well as their progress and potential financial impact.

How Are Target’s E-Commerce Initiatives Progressing?

Target is planning to re-model its business to remain competitive in the long term, and is planning to invest in enhanced store experiences, grow its digital initiatives and launch new exclusive brands this year. In fact, Target continues to make a push into e-commerce and an omni-channel model, with recently introduced initiatives such as next-day shipping, as Target plans to compete with Amazon Prime and Wal-Mart’s free shipping. The company is pilot-testing this service – called Target Restock – for essentials such as detergent, laundry and coffee in the Minneapolis area, which will be available to REDcard users for an unspecified fee. This service is expected to be up and running by the end of 2017.

Target also announced plans to introduce mobile payment features to facilitate convenient payment among its customers, following in Wal-Mart’s footsteps. However, the company has yet to reveal when that will be happening. This feature is expected to be integrated with Target’s app – which itself will be combined with the functionality of the company’s Cartwheel coupon app this summer. The popular Cartwheel app has grown to 27 million shoppers that signed up for it, in a span of three years. The app basically allows users to redeem reward points and receive discounts through barcode scans through the app. In addition, Target further recently rolled out a 360 degree shoppable living room (a digital showroom), to improve the digital experience in the furniture segment, which is already a large and growing online business for the company. This experience will initially display about 120 products across four design aesthetics.

Why Do E-Commerce Initiatives Matter?

Target has been investing heavily in e-commerce initiatives, in response to pressure on comparable sales growth brought by declining traffic at brick and mortar stores, driven by small declines in both traffic and average transaction amounts.

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In Q1 2017, Target’s overall sales declined (-1% y-o-y), while its e-commerce sales continued to grow (22% y-0-y translating to $688.7 million). The company’s online sales accounted for 4.3% of Target’s total sales, up from 3.5% last year. For the same period, this compared to around 3.2% for Wal-Mart. Although – like many retailers – Target is grappling with declining comparable store sales, that can be offset through effective e-commerce initiatives given the growth in its online sales.

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Target’s upcoming initiatives in the digital transition could lead to some margin pressure given the significant investments they may entail. Accordingly, the company expects to generate about $1 billion less in earnings before interest and taxes (EBIT) in 2017 than in 2016. The long-term benefits, however, should be substantial.

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