HomeBusinessHere's what Target needs to do to get its act together

Here’s what Target needs to do to get its act together

Target (TGT) needs to clear its operating aisles if it wants to close the financial gap with rising rival Walmart (WMT).

“I’m concerned about Target getting its act together,” says retail expert and investor Jeff Macke on Yahoo Finance’s ‘Opening Bid’ podcast (video above; listen here).

Macke knows a thing or two about Target’s history.

His father was Kenneth A. Macke, the former chairman and CEO of shopping center operator Dayton Hudson – the predecessor to Target. The elder Macke rose from sales intern to chairman and CEO of Target, then a division within Dayton Hudson.

He went on to lead the entire company during a 33-year career and is credited with creating the modern Target.

The younger Macke vividly remembers walking the aisles of Target with his father to identify potential operational problems and opportunities. He was maniacal about efficient operations, Macke recalls.

But today’s Goal continues to face some challenges.

In May, the company reported a surprise first-quarter profit loss. Chairman and CEO Brian Cornell cited cost-driven food and household necessities as the culprits, adding that inflation was “putting pressure on consumers’ wallets.”

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As consumers looked for cost-effective staples like bread, eggs and milk, interest in luxury items faltered again.

To address changing consumer demands, Target has begun lowering prices on consumer goods, offering approximately 5,000 items at a discount by the end of the year. This move can boost visitor traffic, encourage longer browsing, and hopefully result in more sales.

Macke offers a few other suggestions to Target executives.

Manage the shrinkage (or shoplifting) factor first.

According to a report from the National Retail Federation (NRF), the average shrink rate increased to 1.6% in fiscal year 2022, compared to 1.4% in fiscal year 2021. “As a percentage of total retail sales in 2022, that shrinkage represents $112 .1 billion in losses,” the NRF wrote.

Target executives said in 2023 that contraction had significantly hurt profit margins. Another effect of theft is that stolen goods are offloaded by third-party sellers.

Macke said Target became an easy target in this frenzy. Because it was “the friendliest discount store, it wasn’t a setup that prepared them for that unbridled shopping frenzy.”

The company must create a cheerful shopping environment that deters theft, Macke added. Putting entire aisles of merchandise behind plastic may not be the best way to store items, but take inspiration from Costco (COST), which uses associates to check guests in and out seamlessly.

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In implementing this, Target must remain inclusive and aware, but also practical.

Compared to the Pride launch that received its own Wikipedia article last year, it was a pretty quiet June for Target. Remember, the release and the company’s response to consumers in 2023 got things in hot water with conservatives and liberals alike.

As Target looks ahead, Macke says the retailer should strive to perform well in its core competencies and continue to build out its Circle rewards program.

In April, Target launched Circle 360, a membership program that costs $99 per year. The program offers unlimited free same-day delivery on orders over $35 in just one hour, among other benefits.

It competes with paid membership programs Amazon (AMZN) Prime and Walmart+.

“That’s where Walmart has separated itself,” Macke said of Walmart+.

Well there and the financials and the stock price.

Target’s same-store sales fell 3.7% year over year in the first quarter, compared with a 3.8% gain for Walmart. While Target’s revenues fell 1% this quarter, Walmart’s fell 22%.

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Over the past year, Target stocks are up 7%, underperforming the S&P 500’s (^GSPC) 25% gain. Walmart shares are up 32%.

“We think Target can turn traffic positive and ultimately drive margins to 6%. It’s a matter of how long the investment will take to get there, and what the market would pay for it. Walmart still seems to be the stock gaining momentum for us,” Evercore ISI analyst Greg Melich said in a client note.

The buy now, pay later industry continues to change the way consumers pay for goods and services. Affirm (AFRM) co-founder and CEO Max Levchin shares what his company is planning to do with Apple (AAPL) on this front on the ‘Opening Bid’ podcast. Listen in below.

Grace Williams is a writer for Yahoo Finance.

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