On Tuesday, Baird analyst Peter Benedict upgraded Target Corporation (NYSE:TGT), raising his target price on TGT stock to $85. That’s 12% better than its current value. The basis of the upgrade makes sense (on the surface anyway).
That is, between a Target store-remodel program that arguably makes some Walmart Inc (NYSE:WMT) look relatively aged and a new same-day delivery service that could put pressure on quick-delivery options from Amazon.com, Inc. (NASDAQ:AMZN), Target was apt to turn some consumers’ heads back in its direction.
Tax cuts won’t hurt either.
The thesis, however, doesn’t appear to fully appreciate the logistical headache that the introduction of same-day shipping introduces. Never even mind that fact that Target lacks the scope and scale it needs to adequately compete with Amazon or Walmart on that front.
It’s Still About the Bottom Line
“Key company-specific drivers include accelerated remodels, additional exclusive brand launches, and emerging convenience-oriented fulfillment options,” adding “In short, we believe the addition of Shipt will help boost TGT’s digital sales in fiscal 18 and beyond.”
The point is well taken. Offering same-day deliveries of goods sold at its stores, and picked from the customer’s nearest store, will add digital sales. Meanwhile, new brands and store remodels will draw foot traffic to its stores. The questions are, will those efforts drive meaningfully more business, and will they drive actual profit growth for TGT stock?
Probably not.
Shipt, in case you weren’t aware, is the same-day delivery outfit Target acquired in December. Built from the ground up to ferry groceries from multiple grocery stores to a customer’s home, CEO Brian Cornell aims to expand the same-day shipping option to several product categories in most major markets by next year.
Undoubtedly, some would-be customers will like it. It’s not a game-changer though, and certainly not the basis for the kind of leg up Target needs on Walmart and Amazon.com.
Perhaps above all else, know that Amazon’s Prime program loses money. The estimated size of that loss varies from one observer to the next, but nobody thinks even the recently-raised monthly cost of $12.99 offers any actual profit potential for Amazon.com.
The value is in the business that those Prime memberships create. The average Prime subscriber spends about $1,300 per year at Amazon.com, which is roughly twice what the typical non-Prime members spends at the e-commerce venue… a venue that sells everything.
It seems unlikely Shipt members will spend an additional few hundred dollars per year they wouldn’t have otherwise spent with the company, particularly when the selection of merchandise is considerably smaller via Target. Never even mind that fact that Walmart has been experimenting with its own same-day shipping service.
But the cost of offering Prime doesn’t come cheap to Amazon, in that it includes access to a large library of video content and the company has to outsource its deliveries to names like United Parcel Service, Inc. (NYSE:UPS) and FedEx Corporation (NYSE:FDX)?
That’s a legitimate counterargument. But, Shipt has unique costs of its own.
For one, it’s labor intensive. For same-day shipping to work, it means Target will need to use its own stores as warehouses, which means store employees (or Shipt employees) will need to hand-pick orders as they come in.
Amazon does the same, but Amazon is a well-oiled machine with an inventory-management system designed specifically to pick and pack goods with as little effort as possible. Target will be pulling items one at a time from a retail sales floor.
FedEx and UPS also offer something to Amazon than Shipt can’t offer Target… at least not yet. That’s scale. The average UPS or FedEx truck is packed with hundreds of parcels, each one to be dropped off in the most cost-effective order.
Shipt, conversely, utilizes contractors with cars, a model that’s not exactly proven ideal or sustainable due to limited scale and scope, especially when the focus is on perishables, as it initially is for Target. It could cost well over the $99 per-year fee to service a frequent user of the program.
Bottom Line for TGT Stock
Don’t read the worst into the message. With or without the same-day shipping initiative, Target is showing signs of life it hasn’t shown in a long while. The company topped its Q3 sales and earnings estimates, and same-store sales growth of 0.9% was better than the expected 0.4% improvement.
It’s not an outcome that makes TGT stock a better pick than WMT or even AMZN though. Anything Target can do, either one of those rivals can (and likely will) do better simply because of their bigger size.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
