Target’s sales sink in Q4 (TGT)

BI Intelligence

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Despite incredibly strong digital growth, Target’s revenue dropped 4.2% YoY to $20.7 billion in Q4 2016.

The decline was largely due to falling in-store purchases, as comparable store sales were down 1.5% YoY for the period, offsetting a 34% YoY increase in comparable digital sales. Target said in-store sales will continue to fall and are expected to decline by single digits in 2017.

The retailer also forecast a $1 billion shortfall in profits during 2017 as a result of major investments aimed to turn around its business.

• The company plans to invest $2 billion in several initiatives such as expanding its use of analytics and improving its supply chain.
• It also plans to open 100 new small-format stores in cities and near colleges.
• Target will launch more than 12 new brands, which it said should account for more than $10 billion in sales over the next two years.
• The company plans to launch a broad competitive pricing initiative aimed at undercutting competition from discount retailers.

Despite the impressive online sales growth, e-commerce still only accounted for 6.8% of Target’s total revenue in Q4. Investing in initiatives such as analytics and supply chain is a clear indication that Target plans on building its online business, and is adjusting to avoid mistakes it's made in the past. The company had trouble keeping its store shelves stocked after the introduction of its ship-from-store feature, for example. Further investments in its supply chain could help Target avoid common issues related to shipping costs and inventory management as it expands its digital services. As online sales were the single highlight for Target in an otherwise dismal Q4, expanding this segment seems to be the only path for the company to remain relevant.

Digital is dismantling the retail industry brick by brick. The most successful retailers are the ones with thriving digital businesses, while physical stores are becoming more liabilities than assets. 

However, e-commerce isn't without its challenges. In contrast to waning demand for in-store retail, rising demand for online retail has created a bottleneck at the fulfillment stage, whereby carriers and retailers are struggling to manage the increasing volume of online orders. This is presenting an opportunity for legacy retailers to leverage their gluttony of physical retail space to help fulfill these sales.

Ship-from-store — a fulfillment process where retailers use stock from their store's estate to fulfill orders — can help brick-and-mortars evolve and avoid stagnation. This method is an essential strategy for legacy retailers because it can help them survive digital disruption and remain competitive with e-commerce giants like Amazon. 

BI Intelligence, Business Insider's premium research service, has compiled a detailed Ship From Store report that explains how retail stores have become a liability and assesses the opportunity to use stores as distribution points for online orders. It also breaks down how the ship-from-store method works, and examines its benefits, the steps needed to implement it, the retailers best positioned to use it, and the implications it presents for the industry at large. 

Here are some key takeaways from the report:

• E-commerce is cruising with no indication of slowing down. BI Intelligence forecasts that digital retail sales will reach $632 billion by 2020. This means online sales will continue to eat into in-store purchasing, placing pressure on brick-and-mortars to remain profitable. 
• Digital is moving to the core of retailers' strategies, and existing real estate can be leveraged to support a digital business. Large retailers' stores are densely distributed, providing an opportunity for them to serve multiple purposes.
• Ship-from-store has proven to be beneficial for retailers that have tested it. The results retailers have seen include higher sales, faster delivery times, easier inventory forecasting, improved margins, and lower costs.
• Large retailers with densely distributed stores and low-turnover inventory are in the best position to test the ship-from-store model. Retailers need ample square footage to turn existing aisles or backrooms into storage for online orders, and slower turnover in order to convert excess inventory to online orders. 

In full, the report:

• Explains how legacy retailers can leverage their physical space to support distribution for e-commerce channels. 
• Details the steps that retailers have to take in order to implement a successful ship-from-store model.
• Discusses the characteristics that make a retailer well positioned to benefit from turning its stores into distribution centers. 
• Provides insight on how the ship-from-store model can augment the retail industry at large.

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