Target's Call To Action: Regain 'Merchandising Authority'

Target ’s CFO, John Mulligan, took a wide range of questions on the company’s Q2 earnings call Wednesday morning. There are some positive signs amid apparent weakness.

Results were in line with what Target projected on August 5.  Sales for the quarter were flat, but improved every month, and actually turned positive in the last six weeks of the quarter.  Digital sales were up 30 percent, and mobile site visits increased more than 60 percent over last year. Digital and mobile contributed significantly to the company’s comparable sales.  In-store traffic continues to be down, but it has improved significantly from Q4 2013, when the data breach apparently caused it to fall off the table.

With regard to the data breach, Mr. Mulligan reported that all Target’s internal metrics indicate the vast majority of Target shoppers have put that disaster behind them.  Those metrics focus on consumer trust and confidence.  Any remaining customer mistrust was deemed “immaterial” to the company’s business results and expected to dissipate over time.

Picture taken approaching the Target store in West Hollywood, California. (Photo credit: Wikipedia)

In Canada, Q2 sales increased 63 percent, but fell short of the company’s expectations. The company is planning what amounts to a re-launch in Canada, but Mr. Mulligan said there was still work to be done before Target invited guests to give Target another look.  Apparently, the original assortment in Canada was a subset of the US assortment, missing key items and categories the Canadian customer was looking for – specifically, unique products. In truth, that’s what the US customer has been missing as well. However, before the marketing re-launch in Canada, the company is working to improve its supply chain and systems to support a better in-stock position.

In fact apparently store associates in Canada, loathe to look at empty shelves, had done their own re-sets within the stores to fill in the gaps.  This created cascading problems when new merchandise actually did arrive – there was no longer anywhere to put it.  So the company is working to re-institute corporate standards in stores.

Certainly there was a lot of talk about the current hyper-promotional environment in the US. Every retailer seems to have its own spin on the root cause of this promotional madness: Target’s take is flat wages in the face of inflated food prices. We can expect more promotions in the holiday season, even as Target recognizes it will put downward pressure on gross margin (and, I believe, also on top-line sales).

But in many ways, these are nuts and bolts, and not core to Target’s problem. The most important statements Mr. Mulligan made were the recognition that Target has lost what Mr. Mulligan called its “Merchandising Authority” and is taking steps to regain that authority.  Re-defining this Merchandising Authority will take some time: specifically, as we pointed out in an earlier piece, new product introductions can take from six to nine months.  The goal is to re-excite the consumer about the products Target sells both on-line and in-store. The company has already done a baby product re-set and is moving on to apparel.

Merchandising Authority is a very important term, and describes “old Target” better than any words I could come up with.  From TV ads, to billboards, to the actual products you’d see on web sites and in stores, Target was reliably edgy and chic. The battle for grocery dollars was part and parcel of the race to the bottom, and “recent Target” gave customers little reason to avoid H&Mfor clothes, or West Elm for home goods. There was not a lot of freshness there. In this case, it’s great to hear a company acknowledge its real problem.

There’s no doubt that we’ll see more promotions in Q4. The retail environment remains challenging, and the race to the bottom continues.  But looking forward to 2015, if Target can regain that Merchandising Authority, perhaps it can increase trips to stores and digital channels based on product freshness, while staying close on price.

Some may say “In a race to the bottom, the company with the lowest cost wins.”  I believe that those who stay out of the fray, and focus instead on innovative products and superior customer service always win. That doesn’t give any company carte blanche on price.  Products still need to be priced sharply. But it does mean that there are better battles to fight.  Target’s analysis is right on Target.