What The Shipt Acquisition Signals About Target’s Strategy
Target (NYSE: TGT) recently announced that it has agreed to a $550 million acquisition of Shipt, a company that delivers same-day groceries, in an all-cash transaction. The retailer plans to leverage its network of stores and Shipt’s technology platform and community of shoppers to quickly add same-day delivery to its capabilities. While Shipt will operate as a wholly-owned subsidiary of Target after the acquisition, it will also run its business independently with other retailers – such as Costco (NASDAQ:COST) and Kroger – seeking same-day services. In addition, a Shipt membership of $99/year would be required for unlimited deliveries from its platform. This deal is Target’s largest acquisition to date, and is expected to be modestly accretive to its net earnings in fiscal 2018.
As the brick and mortar industry faces stiff competition in the grocery sector and growing overlap with Amazon (NASDAQ: AMZN) since it purchased Whole Foods, retailers such as Target need to focus on faster delivery of essentials to stay competitive. Target has been investing heavily in e-commerce and omni-channel retail strategies in order to keep up with changing retail industry dynamics. Accordingly, this acquisition is likely to significantly accelerate Target’s digital fulfillment efforts, where same-day delivery will be available to half of its 1800 stores by early 2018. This acquisition is also in line with Target’s previous acquisition of Grand Junction – a transportation technology company – which will likely help the company in strengthening its supply chain and improving its last mile delivery capabilities.
Grocery Business In Focus
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Target generates stronger overall sales in stores that offer groceries, which represent about 20% of the company’s total sales. Target has spent billions on e-commerce initiatives and is working hard to improve its capabilities in the grocery space, as the retailer captures only 2.1% of the U.S. grocery market. Groceries are important because the company continues to witness pressure on comparable sales growth, driven by declining traffic and lower average transaction amounts at brick and mortar stores. However, Target’s store comparable sales grew positive in Q2, followed by flat sales in Q3, which shows that the company’s strategy of investing in its stores to grow traffic is working out, at least to a degree.
Target is in a transition phase right now, trying to overhaul its business by investing more than $2 billion this year. The company’s strategy also includes renovating stores, supply chain improvements and increased promotions, all at an estimated cost of $7 billion over the next 3 years. However, it is going to take a lot of effort on its part to keep up with Amazon (not to mention Wal-Mart, which has spent billions on e-commerce initiatives and acquisitions).
Our $59 price estimate for Target’s stock is slightly below the current market price.
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