It has been a difficult year for Target (NYSE:TGT). The data breach and a failed move into the Canadian market have weighed on Target shares, which are down 4% this year. However, Target is slowly trying to get back on track, and it won't be surprising if it bounces back going forward. Let's take a look at the moves Target is making in order to improve the business.
Improving customer confidence
To strengthen its system, Target management has decided to move all of its REDcards under MasterCard's (NYSE:MA) industry leading chip-and-PIN technology, coupled with an accelerated rollout of chip-enabled card readers to all of its stores by September this year. This is an important step taken by Target to restore confidence among its guests.
To improve its performance in the Canadian market, Target is aggressively rolling out enhanced tools and technology, and is increasing the intensity of its volume messaging. With these measures, Target is trying to address the sore points that have affected its business so far.
Strategies to drive sales
In addition, Target's board is focused on three key priorities. First is to grow traffic and sales in its U.S. segment by delivering unique products and services at attractive prices. So, management is working fast to drive efficiencies in its merchandising and presentation. Second, Target needs to improve its Canadian segment performance by improving its operations, and it is taking some steps to do the same as we saw above.
Target is trying to connect with customers in Canada, and recently posted a video apology on YouTube after a disappointing entry into the country. As reported by CTV News:
"Target has taken to YouTube in order to apologize to Canadians, using the voices of its employees to take responsibility for a disappointing first year in the country."
The two-and-a-half-minute video features interviews with Target employees reflecting on the problems the company has faced and promising improvement in the future. The interview clips are played over montages of brightly-lit, well-organized stores.
"We had a really challenging first year and things didn't turn out exactly the way that we thought they would," Arlene Stratton, a senior buyer at Target, says in the video, which was posted last week.
"But we're listening to the guests and making great changes."
Hence, Target is relying on customer feedback to improve its position in the Canadian market, and this looks like a smart opportunity.
The retailer is also accelerating its digital transformation by focusing on the omni-channel. It is becoming flexible to serve guests by eliminating barriers that prevent them from shopping with Target. As a result of the company's moves, Target's digital visits for the first quarter increased more than 20% from a year earlier, which was the fastest growth among the group consisting of Target and its largest online competitors.
Moreover, Target is keen on developing smaller, more flexible store formats to serve guests in markets that can accommodate its larger store layouts. It plans to continue its expense optimization efforts by freeing up resources to support faster growth. In addition, it is aggressively marketing its products to land more customers.
Aggressive marketing and new products
Target recently launched a year-long Target Run marketing campaign in the U.S., featuring national and owned brand items across categories like food, personal care, baby, paper and pets to help strengthen Target as the destination to shop for anything, anytime, anywhere. The first-quarter promotions helped in strengthening Target's brand, combined with its focused on offering new items.
The home category is one of the fastest growing online categories at Target. Target.com launched over 2,000 new furniture items from Safavieh in March, which is a brand that online guests recognize for having great style at an accessible price.
Also, guests are on the lookout for natural, organic, and sustainable products that are better for them and their families. To address this market, Target has launched Made to Matter, which is a first of its kind collection that brings together 17 leading natural, organic, and sustainable brands to showcase new products and make them more accessible for guests.
Improving the customer experience
The recent rollout of in-store pickup of digital orders is also gaining traction. These orders comprise approximately 10% of digital transactions, with an advantage that when guests pick up their items, more than 20% of the time they shop and spend much more than the company's average basket. To make the most of this opportunity, Target has expanded the number of stock keeping units eligible for in-store pickup to more than 60,000, including some shelf stable grocery items during the first quarter.
Target plans to rollout standard shipping from 136 stores in 38 markets across the country late in the year. It has lined up exciting deals, services, and products designed to accelerate trips to Target across all of its channels. It's further upgrading its mobile portfolio to improve the experience and drive continued increases in conversion.
Target is also working to integrate the site of CHEFS and Cooking.com with its overall digital experience. It is expanding the CHEFS assortment on Target.com, and is promoting the brand through orders for cooking and kitchen items. Moreover, Target is positive about its investment in startup company Cosmic Cart, which offers a universal shopping cart for publishing websites and blogs.
Finally, Target has an impressive valuation. It trades at a trailing P/E ratio of 20, while a forward P/E of 14 indicates that earnings growth is in the cards. In fact, over the next five years, Target's earnings are expected to grow at an annual rate of 13%, which is way better than the growth of 0.75% seen in the last five years.
Also, Target carries a healthy dividend yield of 3.60%. There's a chance that this dividend can increase in the future because the company's payout ratio is quite reasonable at 56%. In addition, Target's cash flow generation is robust, with the company reporting an operating cash flow of $3.81 billion in the last twelve months. Considering all the positives, Target looks like a good buy on the pullback.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.