When investors think about success stories in online retail, usually only one name comes to mind … and it’s not Target Corporation (NYSE:TGT). Rather, Amazon.com, Inc. (NASDAQ:AMZN) is quite rightly considered by most to be the undisputed king of online retail.
With 2015 U.S. e-commerce revenues estimated at $112.8 billion, AMZN accounted for 33% of the total U.S. e-commerce revenues generated in the past year and 60.5% of its growth.
“To bottom-line it, Amazon is growing very rapidly at a large scale and essentially sucking all of the oxygen out of the e-commerce room and, in fact, the overall retail room,” said Scot Wingo, a long-time AMZN observer, in Internet Retailer magazine.
In 2015, AMZN accounted for 24% of U.S. retail sales growth leaving the other 76% for thousands of other businesses to fend for; almost like table scraps.
So, how do you achieve online success in an Amazon-dominated world?
The Answer for TGT?
Well, Forrester Research Vice President Sucharita Mulpuru suggests retailers sell products AMZN doesn’t; a second recommendation is for retailers to figure out their weaknesses vis-a-vis Amazon and fix them; and lastly, retailers need to make it easy for customers to buy on their smartphones.
That last one is a biggie.
Data from Bizrates Insights paints an awful picture when it comes to buying products on mobile phones. It believes almost 78% of shoppers have had problems or issues when buying on their smartphones. You can’t possibly expect to grow your online business when you are frustrating potential customers. It’s kind of a no-brainer.
And here’s where Target comes into play.
CNBC on-air personality Courtney Reagan put AMZN, TGT and Wal-Mart Stores, Inc. (NYSE:WMT) through their online paces recently conducting a test that examined each retailer’s speed, cost and accuracy of delivering eight products to four different cities using a standard method of shipping.
The purpose was to assess each of the company’s online capabilities. It’s not enough to have thousands of SKUs available, retailers also need to execute when it comes to delivering the ordered items.
On that front, Reagan’s test found that Target was the overall winner taking two out of the four categories: Speed (TGT), Cost (WMT), Accuracy (TGT) and Communication/Tracking (WMT).
Now, this is only a small sample obviously, but it points out one of the big ways Target stock and others can compete with Amazon for online retail supremacy.
You don’t have to be the biggest — just the best.
If you provide consumers with an enjoyable shopping experience from start to finish, your revenues are going to increase steadily. With U.S. online sales expected to top $530 billion by 2020, it’s worth the effort.
Clearly, the $3.2 billion it has spent on its e-commerce business over the past two years has helped Target stock on the back-end of the online retail equation, but slowing sales growth has prompted personnel changes from the Minneapolis retailer.
At the end of September, Jason Goldberger, TGT’s chief digital officer and president of Target.com, left the company after four years working on revamping its e-commerce business. CEO Brian Cornell suggested that eliminating the role and splitting the duties between its chief information officer and chief merchandising officer would speed up decision-making.
Fair enough.
But it’s obvious that Cornell has grown impatient with TGT’s digital business, which managed just 16% growth in the second quarter ended July 30, lower than the 23% increase in Q1 and 31% jump for the entire fiscal 2015. Like a sports team you sometimes have to shake things up in order to regain momentum.
Bottom Line for Target Stock
I look at the current situation as a glass half-full rather than half empty for Target stock. With its digital business accounting for just 3.3% of its overall revenue there’s plenty of room for growth.
A big step forward on the digital front will come when TGT gets all 1,800 stores set up to ship products from each of the locations. That will dramatically increase the speed at which it gets orders to the customers. And as we’ve seen from the CNBC test, Target’s already doing a bang-up job compared to AMZN.
With $2 billion in cost savings achieved over the last two years, its return on invested capital over the trailing 12 months through the end of the second quarter was 15.8%, 250 basis points higher than for the 12 previous months.
While its overall sales might not be doing much, its profitability and free cash flow generation — $5 billion in operating income and $4.4 billion in free cash flow in trailing 12 months — hasn’t been this healthy in some time.
TGT CEO Brian Cornell still has a lot to fix, but it’s making money and that should keep investors happy until the next growth spurt. Hopefully, its digital business will play a big role in that renewed prosperity.
In my opinion, its digital business makes Target stock a buy. Future same-store sales growth in its brick-and-mortar locations is icing on the cake.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
