Target: Harry's Brings Back The Cool Factor

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About: Target Corporation (TGT)
by: Reuben Gregg Brewer
Summary

TGT teamed up with online razor upstart Harry’s for a brick and mortar experiment.

The results were pretty powerful.

Now TGT has to take that lesson and use it the right way.

Target Corporation (NYSE:TGT) is working through a rough spell. But a recent bright spot hidden within the negative news was a test run with Harry's Razor. Saying it went well would be an understatement, it was a huge success that helps prove to investors that Target can, indeed, be cool again if it tries. Here's the real takeaway from that experiment.

A rough spell

There was no way to sugar coat Target's recent results. Same store sales declined in the second quarter and third quarter. The second quarter decline was 1.1%. And while the decline in the third quarter of 0.2% was an improvement and toward the low end of guidance range of flat to down 2%, that's still not a great showing.

Since the company's fourth quarter guidance for same store sales is for a decline of between 1% and an improvement of 1%, it's basically anyone's guess what the end of the year holds. You probably shouldn't go into earnings season expecting too much, though. And while the company's ongoing repurchase of shares will help support the bottom line, it bought back 19 million shares in the second quarter alone, the same store sales figures show the real problem.

Just a store

Part of that problem is that Target stores don't stand out anymore. They are, to put it simply, lost in the middle without a differentiating factor. Wal-Mart (NYSE:WMT) and the dollar stores are cheaper, Amazon (NASDAQ:AMZN) is the online go to, and there are a host of stores that offer up "cool" better than Target does today. That wasn't always the case.

There was a time when Target was considered hip. It offered up differentiated products with style in an upbeat and pleasant shopping environment. Shoppers even gave the name a "French" twist when saying it, a statement to how well it separated itself from the pack. Now it's just another store in a world where standout out from the crowd is becoming increasingly important.

The Harry's win

Which is why the recent partnership with Harry's is so illuminating. Harry's Razor is an online razor company, selling its own branded products in competition with Dollar Shave Club and Procter & Gamble's (NYSE:PG) online Gillette offerings. According to the Wall Street Journal, it was Target that initiated the idea of bringing Harry's Razor into its stores.

Harry's, meanwhile, saw an opportunity because its research found that a lot consumers prefer to buy blades in stores and not online. So, despite the fact that it was an old school way to sell product, the two started to work on the idea. What they came up with was a bold display for a product that looked cool and filled the niche between cheap razors and high-end fare. Go to one of the stores selling Harry's Razor product and you'll likely come away with the feeling of the old Target cool.

The results of the 1,800 store test? Within a short period of time, Harry's razor handles made up around half of Target's handle sales. Harry's replacement blade sales jumped to 10% of Target's total. It was a cool new product and customers clearly responded.

Will it last?

It's too soon to tell if Harry's can sustain that kind of momentum. I doubt that it can. But that isn't the real takeaway here.

What investors need to watch, and Target needs to learn, is that cool is still important. The giant retailer had clearly forgotten that fact, but Harry's is a wake up call. It was a new product to the store with a bold and unique look. The display was loud and proud, making it stand out from competing fare. And the price point was at the intersection of Target's slogan, "expect more, pay less." Harry's also bridged the Internet/physical store divide.

Target clearly still has some cool left in its tank, it just needs to let it loose. It won't succeed as just another retail store fighting on price. In a world where retailers are fighting for market share and share of mind, Harry's Razor is an experiment that shows just how important being a little different can be. Indeed, Target needs to stand out like it once did… that was the magic factor that drove success.

And I'd argue that there's plenty of room to repeat this process. Online eye store Warby Parker is opening stores, why not bring them into Target? Blue Nile, is being bought by a private equity shop, make a call to see if Blue Nile (NASDAQ:NILE) wants to set up a test to sell through Target's brick and mortar stores. The point is, it doesn't take much effort to look for similar crossover opportunities.

Looking at the idea of cool from an internal view, it will be interesting to see how Target's children's clothing revamp works out. It recently introduced the Cat & Jack brand, meant to be hipper and cooler than what it had previously offered. It's the same conceptual shift, without the outside name and will be a big test of the company's ability to build from within.

The takeaway

Investors watching Target should keep a close eye on same store sales. The company needs to start moving that number in the right direction. However, the way that happens is by Target differentiating itself. The Harry's Razor test is an example that Target can still do that. Internally driven Cat & Jack will be a bigger test to watch on that score. The key to both will be the cool factor. So watch same store sales, but look underneath those numbers for signs of success in the company's merchandise mix. Target probably won't succeed in the fast changing retail world if it's just another store.

Disclosure: I am/we are long TGT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.