May 22, 2024

This morning Target reported another quarter of sequential improvement in declining comps (down -3.7%) as softness in discretionary categories continues to ease. Digital turned the corner into positive comparable sales territory (+1.4%) to offset mid-single-digit declines (-4.8%) in the stores business.

The company expects to return to positive growth in 2Q, with investments into newness and value, and easier comps, the key drivers.

Read on for a summary of the results, with a special focus on what digital leaders need to know.

Action Items for Brands

Forecast an Improvement in Sales Trends in 2Q and Beyond: While its near-term outlook on the consumer remains cautious, management is confident in its trajectory to return to positive comparable sales growth in 2Q, with a full-year forecast of 0-2%. Achieving this growth is reliant on continued improvement in discretionary categories and a reacceleration in its essentials business which was down low-single-digits this quarter. Price drops across the essentials portfolio is expected to help drive the reacceleration, as is easier comps.

Sharpen Your Price and Promotional Plans: Target recently dropped prices on 1,500 essential items and announced price reductions on an additional 5,000 everyday items coming throughout the summer, with vendor participation expected.

This follows the price reduction playbook Walmart emphasized on its own earnings call last week as the number of grocery rollbacks increasing +45% Y/Y in the quarter and the company noted great response from consumers. Throughout the retail landscape, great everyday value and promotions are a critical lever in unlocking growth this year.

Expect Target to increasingly ask for vendor participation in its personalized promotional efforts via Target Circle as well.

Lean Into Innovation as the Second Key Growth Lever: While consumers perceive Target to lags its peers like Walmart and Amazon on value, they see Target often leading in newness and key seasonal moments. Target continues to lean in here, accelerating its percentage of newness within the portfolio quarter after quarter. While this is most prominent among Target’s owned brands and exclusive partnerships, Target is also looking for innovation from vendors.

Expect to Maintain or Grow Roundel Investments: The company did not provide much detail on the Roundel business this quarter aside from it growing 20%+, representing its fastest-growing revenue line. On top of investments into price/promotions and innovation, brands can expect continued asks for increased Roundel spend. Our latest benchmarking suggests a net 13% of brands plan to spend more on Roundel in 2024 as a percentage of sales, primarily given Target’s strategic importance to these brands and overall sales volumes.

    Key Stats

    While sales were down, 1Q represents another quarter of improving trends and both top and bottom lines came in at company expectations.

    The company expects to return to growth in 2Q with comparable sales forecasts of 0-2%. The company maintained its full-year expectations of 0-2% comps as well.

    Behind the Numbers

    The company’s view of the consumer remains consistent:

    • Surprisingly resilient consumer in the face of multiple macroeconomic pressures and lower consumer confidence
    • Consumers are working to stretch their budgets and are pulling back on discretionary categories, although trends are improving as inflation is moderating
    • Post-COVID normalization of spending patterns back into services and entertainment outside the home

    Investments into Price: In order to align with this value-conscious consumer, Target recently reduced prices on 1,500 everyday items and announced plans for price reductions on an additional 5,000 frequently shopped items over the course of the summer. These drops will span both Target owned and national brands, with management noting vendors participating in the funding.

    Target mentioned other initiatives around value (and value transparency) are also resonating with the consumer, such as the automatic application of relevant Target Circle deals, strike-through pricing on Target.com and the app, the clarity of Target Circle offers, and its latest value brand Dealworthy seeing positive early results.

    Newness is Resonating with Consumers: In addition to value, consumers are responding to innovation and Target continues to lean into newness and key seasonal moments, accelerating its percentage of newness within the portfolio quarter after quarter. This is most prominent among Target’s owned brands and exclusive partnerships, but Target is also looking for innovation from vendors.

    Some star examples from 1Q and 2Q ahead:

    • Strong sales momentum in exclusive Prince for Target partnership (pickleball gear and apparel)
    • Diane von Furstenberg partnership was Target’s strongest limited time partnership in years, increasing basket size by ~15% on average and generating millions of unique daily visits to its site during launch week
    • Dwayne “The Rock” Johnson’s men’s grooming line, Papatui, was one of Target’s top personal care launches ever.
    • Exclusive release of Taylor Swift’s The Tortured Poets Department was the biggest music pre-order in Target’s history.
    • Newness in seasonal summer categories across the store (e.g. sporting goods, apparel, suncare) including 125 new seasonal Food & Beverage items from Good & Gather and Favorite Day.
    • The company noted 70% of its guests shop Back to School and Back to College categories and it is going “bigger than ever” this year with relevant and new products at unbeatable value.

    Category Growth Trends: Target’s sale declines were worst in discretionary categories although trends continue to improve quarter after quarter, led by an improvement of nearly four percentage points in apparel (down low-single-digits) compared to Q42023.

    Home and hardlines remain the most challenged categories. Target has passed on cost reduction saving to consumers in some home categories which is driving an acceleration in unit velocity, and entertainment grew high-single-digits thanks to strong performance from the Taylor Swift exclusive album release.

    Frequency categories were down low-single-digits with lower unit volume and less benefit from price vs. last year. Seasonal outperforms overall trends particularly in Food & Beverage, with strong performance for Valentine’s Day and Easter.

    Beauty is an outlier with positive growth in the low-single-digits, led by continued strength in Ulta and Target as well as personal care and skincare categories.

    Pleased with Target Circle Relaunch: The company relaunched its Target Circle loyalty program in April which included:

    • Launching Target Circle 360, paid membership for unlimited same-day delivery
    • Making it easier for consumers to receive savings and understand the value of the program
    • Integrating credit and debit card programs into Target Circle

    The relaunch helped drive over 1mm new members in 1Q with the program now totaling well over 100mm members (one of the largest membership programs in the U.S.; for context, we estimate Amazon Prime has ~170mm members).

    Mentions of Target Circle on social media platforms grew +500% Y/Y, boosted by its Target Lady marketing campaign with Kristen Wiig. The company is committed to continual growth of this program over the coming years, particularly its paid Circle 360 program.

    Inventory Management: Like Walmart and Amazon, Target continues to sharpen its inventory management, with total inventory down 7% Y/Y at the end of 1Q even as it improved in-stock levels (+3% over prior quarter and up even higher vs. last year). Part of this is driven by an improved upstream supply chain, with management noting vendors are approaching pre-COVID levels of in-bound shipments coming in on time and in full.

    Digital Highlights

    Digital Swung to Positive Territory: Digital comparable sales grew +1.4% in the quarter, the first positive quarter in over a year. Growth was driven by Same-Day Services (+9%) as nearly 98% of all sales were fulfilled via stores in 1Q.

    Most notably, Drive Up grew 13% in the quarter, generating more than $2bn in sales, 30x larger than the business in 1Q19 (pre-COVID). This compares to growth in delivery outpacing pickup for Walmart. New Drive Up services are receiving high customer satisfaction stores, including adding Starbucks to your Drive Up order and processing returns via Drive Up.

    Marketplace Growing Off of a Small Base: While the Target Plus marketplace accounts for less than 2% of total sales today, management believes it will play an outsized role in growth in the quarters years to come (while still prioritizing curation over the endless aisle). Over the past year, the number of partners and products on the marketplace has more than doubled and Target is expanding assortment with current partners and introducing more brands/sellers in 2Q and beyond.

    Roundel Grew 20%+: Roundel’s 20%+ growth now represents Target’s fastest growing business and is contributing to the bottom line as well. That growth compares to +26% for Walmart Connect in the U.S. and 24% for Amazon Ads.

    Strong Performance During April’s Target Circle Week: Target noted a strong Target Circle Week in April with outsized performance in digital. Its website and app saw the highest traffic in the past year outside of the Q4 holiday season.

    Progress in Personalization: Developments in generative AI and personalization capabilities are driving more refined product recommendations, search results, and more – with the company pleased with the progress. A personalization pilot with one of Target’s largest vendors in personal care yielded a 3x lift in conversation rate from personalized vs. mass promotions with higher sales lifts across the rest of the category as well.

    Omnichannel Consumer: Target reemphasized the blurring of lines between digital and stores, as ~50% of guests opening the Target app on a given day make in-store purchases that same day, using the app to help plan their in-store shopping trip, check prices and compare products inside the store, and navigate store aisles.