The media and online frenzy over the bungled launch of the Lilly Pulitzer fashion line launch shows everything that’s wrong at Target Corporation (NYSE: TGT). Target, as observers know, is a company with a lot of problems, the biggest of which was its complete failure in Canada, a comedy of errors that ended with a dramatic dash back to the U.S. border in January.
Some analysts have pointed to the popularity of Pulitzer’s line of clothing and the media buzz it generated as a reason to buy Target. It is obvious those people are reading the headlines rather than the financial numbers. The revenue figures indicate that Target simply has not been participating in the ongoing retail recovery, and its future prospects are limited.
Target reported a quarterly year to year TTM revenue growth rate of 1.15% on Jan. 31, 2015; that was lower even than the dismal figure at Walmart Stores Inc. (NYSE: WMT), which was 1.43%. In contrast, the bottom-feeding dollar store operators Dollar Tree Stores (NYSE: DLTR) and Dollar General (NYSE: DG) reported revenue growth rates of 10.77% and 9.9% on the same day. One of my favorite retailers, the grocer and discounter Kroger (NYSE: KR), reported a revenue growth rate of 8.55%.
Changing Consumer Behavior Hurts Target
These figures clearly indicate that American shopping patterns have changed in a way that hurts traditional big-box store operators like Target and Walmart. Consumers are no longer shopping for items like clothing and electronics at big box stores. Instead, they seem to be buying them online from venues like Amazon.com (NASDAQ: AMZN), which eliminates the need to drive out to the big box store.
It is no coincidence that Amazon reported a TTM revenue growth rate of 15.08% on March 31, while Target and Walmart’s sales were staying flat. America’s middle class has changed its shopping habits dramatically in the past decade.
Instead of driving to Walmart or Target, shoppers are going to the dollar store or the supermarket in the neighborhood for things like groceries and laundry detergent. Kroger, which is now offering competitive prices to Walmart and better prices than Target on a lot of products, is at the cutting edge of this trend.
The legions of fashionistas that Target historically depended on now do their clothes shopping online at venues like Amazon.com and its Zappos.com subsidiary. They have little or no incentive to go to Target.
Walmart Understands the Problem; Target Does Not
This brings us to the real problem at Target: its executives, unlike their brethren at Walmart, do not seem to realize what is going on. Walmart executives seem to be in a panic because of the dismal sales growth. They are shutting down stores, making drastic changes and pushing their Walmart Neighborhood Market concept, which is a direct challenge to both Kroger and dollar stores.
We see none of that kind of urgency at Target; instead, the management team is behaving like it is 1995. They seem to think that selling a few designer dresses at good prices and tweaking the returns policy will somehow revive their sales.
What is needed at Target is the kind of dramatic change we see at Walmart. Walmart’s management team is completely redesigning its stores, experimenting with new kinds of stores, and constructing the kind of serious infrastructure needed for effective online retail.
Walmart is building two more giant e-commerce fulfillment centers, one in Atlanta and one in Bethlehem, Pennsylvania, CEO Doug McMillon announced in October. That will give the retail giant five distribution centers dedicated to online retail in the USA. Walmart is creating the kind of online retail ecosystem that Amazon has.
Meanwhile, Target’s idea of online retail expansion is to cut the minimum order price for free shipping to $25. Walmart’s minimum order price for free shipping on online orders is $50, and Amazon’s is $35.
Pulitzer Mess Indicates a Poor Understanding of Online Retail at Target
I have to ask the question: What good is such an offer if Target lacks the infrastructure to deliver on that promise? The Lilly Pulitzer debacle indicates that Target lacks such capability. News reports indicate that Target had to limit access to the website in order to keep it from crashing. The site was even inaccessible to all customers for about 20 minutes.
If that was not bad enough, when the site came back up, Target did not have enough Lilly Pulitzer merchandise to keep up with the demand. That sounds as if Target’s brass does not understand either basic logistics (having enough goods available to fill orders) or online retail (having a website that can meet the demand).
Target managed to turn a media event designed to attract customers into a debacle that annoyed shoppers. I wonder how many of the shoppers that took the time to go to Target.com for the Pulitzer event will now avoid Target like the plague.
This shows us that Target CEO Brian Cornell’s commitment to online sales is little more than a press release. A better strategy would be to build up the online capability before staging such an ambitious event. The way to build business online, as Zappos.com has demonstrated and Walmart understands, is to offer good, consistent customer service and low prices, a strategy which builds customer loyalty and steady sales traffic instead of staging tawdry publicity stunts.
The bottom line is that Target just does not get the ways in which retail is changing, but Walmart does. Simply offering one line of designer clothing at fantastic prices is not going to turn Target around.
Smart investors should put their money into the company doing the hard work necessary to adapt to the new retail environment—Walmart—and ignore Target’s sideshow. Cheap theatrics are not going to bring back the glory days of the 1990s at Target.
Disclosure: your Blogger owns shares of Kroger and plans to keep them for a long, long time.