How Target plans to profit from Amazon
Target is preparing to leverage what it sees as a multi-billion-dollar opportunity emerging as a result of Amazon-driven consolidation in retail.
CEO Brian Cornell said in a first quarter earnings conference call that the retailer could see new growth in its business as department stores and other retailers are killed off by Amazon.
"We see a $45 to $60 billion opportunity [from retail store closures in the future]," Cornell said. "Some would call my estimate conservative, we could see well over a $100 billion opportunity." Cornell said the retailer intends to take advantage of the opportunity by launching new private label brands and adding products to its assortment (such as appliances and mattresses) that have long been sold by department stores and other retailers.
Cornell's comments came amid another mixed fiscal quarter for Target.
For the first quarter ended April 30, comparable sales decreased 1.3 percent, driven by declines in both traffic and basket size. However, comparable digital channel sales increased 22 percent, on top of 23 percent growth in first quarter 2016. Target's net income rose to $681 million, or $1.23 per share, from $632 million, or $1.05 per share, a year earlier. Revenue fell 1.1 percent to $16.02 billion.
“Target’s first quarter financial performance was better than our expectations, reflecting strong execution by our team as they delivered for our guests in a very choppy environment. After starting the quarter with very soft trends, we saw improvement later in the quarter, particularly in March,” said Cornell. “We are in the early stage of a multi-year effort to position Target for profitable, consistent long-term growth, and while we are confident in our plans, we are facing multiple headwinds in the current landscape. As a result, we will continue to plan our business prudently while preparing our team to chase business when we have an opportunity.”
In second quarter 2017, Target said it expects a low single digit decline in comparable sales, and both GAAP EPS from continuing operations and Adjusted EPS of $0.95 to $1.15.
“Target’s Q1 performance, which we would characterize as mixed, though in line with our expectations, with a flattish top line and some margin compression balanced by robust cash flow generation and solid online sales, reinforces our view that its strategic shift will take time,and therefore potential progress is difficult to view through a short-term lens,” said Moody’s Lead Retail Analyst Charlie O’Shea. “Given the scope of this transition, year-over-year comparisons will be difficult, though we believe online sales growth and operating cash flow levels will be meaningful data points. At present, Target’s strong balance sheet, excellent liquidity, and flexible financial policy regarding shareholder returns provide the company with sufficient credit support to execute its plan.”
Target also said it is launching at least 30 new small format stores this year.
For full-year 2017, Target continues to expect a low single digit decline in comparable sales.