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Target

Target Corporation (US)

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Target is the second largest general retailer in the US behind Walmart, with 1,800 stores nationwide. One of the retail success stories of the 1990s, the company has been transformed from a sleepy department store business to one of the country's most aggressive retail brands. Key to Target's success was its strategy of positioning itself as a high-style brand despite its low prices, attracting shoppers who would normally avoid discount retailers. It did this with clever and eye-catching marketing and a series of partnerships with high-profile design-led suppliers. Historically a US-only business, it launched into Canada for the first time during 2013, opening more than 120 stores in less than a year. However this wildly ambitious project proved a dismal failure, and the group's troubles were exacerbated by a huge online security breach which resulted in theft of personal information for millions of customers. The plug was pulled on Canada at the beginning of 2015 to allow the group to focus on boosting its US performance. So far, though, this has proved harder than expected.

Advertising

Who handles Target's advertising? Click here for agency account assignments for Target from adbrands.net. The group declared gross advertising costs of $1.50bn for the year to Jan 2017.

Competitors

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Brands & Activities

Target managed an impressive feat in the 1990s and 2000s, combining discount prices with high quality, high style products to make good design readily affordable for all shoppers. The group achieved phenomenal growth from the mid-1990s onwards, overtaking Kmart as the #2 discounter, and it showed little sign of stopping as it followed Walmart into grocery and pharmacy retail, and then into Canada. Having divested the two smaller retail chains that were slowing down profit growth, Target seemed intent on challenging Walmart's dominance of the discount segment. A sign that it had the bigger company rattled was Walmart's attempt to establish its own presence in the upscale discount segment.

Until recently Target had only operated in the US market. (The Australian chain of Target stores is entirely separate, part of Wesfarmers, although it uses similar branding). However, the group has a substantial back-office operation in India, and in 2011 set the groundwork for a huge push into Canada, acquiring the Zellers store chain from local retailer HBC. Around 130 stores reopened as Target Canada in 2013 and 2014. However the launch failed to meet expectations, with Canadian customers underwhelmed by the new outlets.

Another serious roadblock in the company's growth was a devastating cyber attack over the 2013/14 holiday season in which millions of customers' personal or credit card information was stolen. Personal details for as many as 70m customers were accessed, credit card information for 40m. That massive security breach was a key contributor to the subsequent resignation of CEO Gregg Steinhafel in May 2014. With Canada still a continuing drain on the group's performance, there was growing speculation by mid-year that Target might seek to exit Canada. The bell finally tolled for Target Canada in Jan 2015, when new CEO Brian Cornell announced the closure of all operations there. The removal of that burden appeared to give the US business a temporary lift, but this was swiftly followed by a downturn during 2016.

Target sells a wide variety of general merchandise, apparel and home goods, with over 1,800 outlets across the US by early 2017. Target's main brand promise is "Expect More. Pay Less", supported by more recent introduction "Design for All". Like rivals Wal-Mart and Kmart, Target offers large stores, selling well-known brands at discount prices. But the company has been careful to position itself further upmarket than its competitors, successfully capturing a more discerning audience who want low prices but are reluctant to be seen shopping at Walmart. The group launched its first small-format CityTarget outlet during 2012, and began testing an ever smaller Target Express store format in summer 2014. For now though, there are still only a handful of these smaller outlets, just 10 at the end of 2014.

Target works hard to ensure that service is "fast, fun and friendly", and generally scores high in customer satisfaction surveys. Indeed, the term "customer" is frowned upon by company managers, who prefer to call their shoppers "guests". However Target's greatest success has been as a result of its keen eye for distinctive and unusual designs or products. The group has achieved wide recognition with eye-catching and consistently stylish marketing themed around its distinctive red and white logo and bull terrier mascot Bullseye, as well as a string of exclusive partnerships with well-known designers including Philippe Starck, Isaac Mizrahi and Michael Graves to produce clothing and household accessory lines. An important contribution is made by Target's "creative cabinet", a changing team of strategic advisors, usually experts from other companies or industries, who are paid an annual retainer to advise the group on market trends or developments. The perceived appeal of these upscale-looking items at low low prices resulted in Target being jokingly referred to in some circles with a mock French accent as "Tar-zhay".

Private label or exclusive products account for around a third of total sales. Key inhouse clothing brands include Merona and Mossimo. Recent launches include Simple Shabby Chic and C9 by Champion apparel; Fieldcrest home furnishings, as well as Global Bazaar, a collection of decorative goods sourced from around the world; Target 1-Spot, featuring a changing selection of gift items priced at $1; and GO International, a new limited edition fashion range offering a collection from a different international designer every quarter. However, the group's productive partnership with Isaac Mizrahi ended in 2007, and he joined Liz Claiborne instead. In 2011, Target secured exclusive US rights to Levi's new Denizen label, launched the previous year in China. The biggest new launch that year was a broad range of apparel developed in partnership with Italian designer label Missoni. It also has US rights to the Cherokee brand. In 2015, Target was overwhelmed by the demand for a range of limited edition beachwear by Palm Beach design label Lily Pulitzer at a fraction line of the usual prices.

At a more everyday level, Target has boosted its selection of snacks and meal essentials in regular stores, as well as household and babycare supplies. Many outlets also house Starbucks or Pizza Hut concessions. The group began testing grocery service in 1995, and has slowly but steadily rolled out the concept in existing large stores under the SuperTarget brand, with an adapted "Eat Well. Pay Less" slogan. There are now 276 SuperTarget outlets, and another 1,500 stores offer an expanded grocery selection on top of general merchandise. As a result it is now the #3 food retailer in the US after Walmart and Kroger. Private label brands include mainstream range Market Pantry, premium Archer Farms, Sutton & Dodge meat and Choxie gourmet chocolate. In a bid to boost its grocery business, and compete more directly with Walmart and the rapidly growing threat from Amazon, Target announced a deal at the end of 2017 to acquire grocery delivery startup Shipt for $550m. Like Uber and similar services, it offers local ordering and delivery of produce through a team of independent contractors.

The group also offers in-store pharmacy services, and for several years enjoyed an exclusive arrangement with UK retailer Boots to market that company's beauty and cosmetics products (until Boots' acquisition by Walgreens). The core Target consumer healthcare brand was relaunched during 2009 as Up & Up. However, in 2015, Target announced a partnership with pharmacy giant CVS. It transferred control of all 1,600 of its instore pharmacy counters as well as 80 health clinics to CVS for around $1.9bn. They now carry the CVS branding.

Mail order division Target.Direct operates a number of mail order and online shopping brands. The online operations are managed in partnership with Amazon, which provides back office and transaction handling services. Separately, the group's Associated Merchandising Corporation subsidiary is one of America's leading fashion merchandisers. The company identifies clothing trends, sources and develops products and supplies back office services to Target as well as to third-party retailers.

The group also built up a substantial financial services division. The Target Visa card, first introduced in 1995 and rolled out nationally in 2001, is one of several REDcards, now carried by more than 9m "guests". The group also offers a variety of striking prepaid GiftCards. By the end of 2007, the group's credit card loan portfolio was worth about $8.3bn, making it the tenth largest in the US and the largest of any non-financial company. In 2008, the group signed a deal to sell just under half of all outstanding loans to JP Morgan Chase for $3.6bn. Under the terms of that agreement, Target retained management control of the main store-branded REDcards, but shared risk with Chase and also markets other financial services to Target customers. It effectively bought out JP Morgan Chase again at the beginning of 2012, before selling on the whole portfolio to TD Bank for $5.9bn at the end of the year.

Until recently Target also owned famed fashion and home goods department store Marshall Field’s. That business was sold to May Department Stores in 2004 for $3.2bn. Mervyn's, a chain of mid-range apparel and home fashion stores, mostly in and around California, was also sold in 2004 to a consortium of private equity investors for $1.65bn. Mervyn's credit card receivables were sold separately to GE Capital for $475m. The two subsidiary chains had seen revenues shrink in recent years, and their disposal allows the group to concentrate on its main, more profitable business.

Financials

After steep growth in the early and mid 2000s, Target's financial performance has slowed significantly since the departure of former chairman and CEO Bob Ulrich, reflecting the more challenging economic environment but also a less vibrant corporate culture. Two years of decline in same-store sales in 2008 and 2009 prompted concerns that the store had lost some of its cachet by placing too much emphasis on food and low prices, rather than on the "cheap chic" which fuelled its rapid growth. However total sales continued to climb steadily each year. For 2012, there was a slight acceleration in growth rate to 5%, resulting in total revenues of $73.30bn. Same-store sales were up a little under 3%. Net earnings rose 2% to just under $3.0bn. Both were best-ever figures.

Performance for 2013 took a big hit from the cost of launching into Canada, the brutal winter of 2013/14, a plunge in consumer confidence in the wake of the catastrophic holiday season data breach, and also the divestment of the company's credit card portfolio. Total revenues slipped by 1% to $72.6bn, but net earnings plunged by more than a third to $1.97bn.

The additional cost of closing Target Canada made a huge dent in performance for the year to Jan 2015. Reported revenues were flat at $72.62bn, but up 2% with Canada excluded. A $4.1bn charge against Canada resulted in net losses of $1.64bn. Net earnings from continuing operations were also down at $2.45bn, but there were clear signs of improvement in the final quarter, with an increase of almost 4% in same-store sales. That culminated in solid performance in the year to 2016, with revenues hitting a new high of $73.79bn and net income of $3.32bn.

The downturn that followed during 2016 took the markets by surprise. That, combined with a gloomy forecast for 2017, caused a sharp decline in Target's share price in early 2017. Same store sales fell by 1.5% over the holiday quarter, and by 0.5% for the year as a whole to Jan 2017. Full year revenues slipped 6% to just below $69.50bn, the first time since 2011 they had fallen under $70bn. Around $3.8bn of the decline was caused by the divestment of pharmacy operations to CVS. A sharp rise in expenses and in finance costs prompted earnings to slump by almost 19% to $2.74bn.

For the year to Feb 2018, Target claimed to have turned a corner at last. "What a difference a year makes," said CEO Brian Cornell. "You don't have to get too far into the numbers to see our strategy is working." Investors weren't so sure, triggering a 4% decline in the company's share price. Target reported its 3rd consecutive quarter of growth, including a 29% increase in ecommerce sales. But earnings per share came in below expectations, and profit margins slipped: proof that more still needed to be done. For the year, revenues were up 3% to $71.9bn while net earnings rose 7% to $2.9bn. However much of that profit increase came from tax reforms. Adjusted earnings excluding exceptional items slipped 13%.

Household essentials, such as personal care and beauty products, detergents and other home consumables, accounted for 22% of revenues for the year to 2017. Food, beverages & pet supplies together contributed the same percentage. Apparel & accessories added 20%, followed by home furnishings & decor (19%) and hardlines such as electronics and entertainment products (17%).

Gregg Steinhafel stepped down as chairman, president & CEO of Target in May 2014 in response to criticisms that the company reacted too slowly to its disastrous data security breach. Subsequent media reports also highlighted growing friction between Steinhafel and some senior executives over slowing growth and the store's fading spark of creativity. He was initially replaced on an interim basis by EVP & CFO John Mulligan. A full time replacement was named in July: former PepsiCo executive Brian Cornell.

Background

The core of the group was founded at the the turn of the 20th century in Minneapolis by real estate developer George Draper Dayton. Originally a dry goods company, Dayton's gradually established itself as a general department store, opening several branches throughout the upper Midwest. It set a worthy precedent in 1946 when it began to give 5% of its pretax profits to charity, and a decade later opened the country's first fully enclosed shopping centre. In 1962, the company launched a new brand, Target, the first retail store to offer well-known national brands at discounted prices. (Wal-Mart and Kmart launched the same year). The first Target store in Roseville, Minnesota was a notable success, and the group launched other outlets following flotation in 1967. Dayton's also introduced bookstore chain B Dalton.

In 1969, Dayton's merged with rival department store retailer JL Hudson to form Dayton Hudson Corporation, with combined revenues of just under $1bn. Joseph Hudson had opened his first clothing store in Detroit in 1881, and by 1900 had become the biggest men's clothing retailer in the US. In the 1950s, the company had developed what was then the country's biggest shopping centre, in Detroit. The combination of the the two companies gave Dayton Hudson a strong presence in the Midwest. But the group's fastest-growing brand was not one of its established department stores, but discount division Target and the B Dalton bookstore chain, which had expanded to almost 800 outlets by the mid-1970s.

In 1978, Dayton Hudson moved west, acquiring like-minded Californian store chain Mervyn's. But a year later, Target overtook all three of its sister brands to become the company's biggest revenue-earner. The Dayton's and Hudson's brands were merged in 1984 although they retained their own branding, and in 1990 the group strengthened its portfolio with the acquisition from BAT Industries of Marshall Field's, one of the country's most famous department store brands. Entrepreneur Marshall Field had acquired a small dry goods store in 1885, and turned it into Chicago's most celebrated retailer, with a particular strength in fashion and household durables. Gradually, the company had extended its presence, opening a number of satellite stores in and around the Midwest. However this series of mergers and acquisitions had left Dayton Hudson with a management-heavy structure that kept costs high. Despite the sale of B Dalton (to Barnes & Noble), the group's financial performance remained patchy throughout the late 1980s and early 1990s.

In 1994, Bob Ulrich, a former divisional head of the Target brand since 1984, was appointed CEO of the group, and he began an overhaul of the business, cutting away management layers to focus on fast, aggressive growth. Most of his attention was directed to the main Target brand, which was expanded nationally from around 550 stores in 1994 to more than 800 by 1998. The company also became the first discount retailer to offer a branded credit card with the Target Guest Card, which proved a significant boost to customer loyalty and also boosted profits as a result of interest charges to late-paying customers. Also in 1998 the group acquired Associated Merchandising Corporation, one of the country's most important fashion sourcing and product development companies. In 2000 the group changed its name from Dayton Hudson to Target in honour of its lead brand, and the Dayton's and Hudson's brands were finally phased out a year later, becoming Marshall Field's. Both Mervyn's and Marshall Field's were sold in 2004.

In 2005, Target reinforced its upscale image by booking all 18 display ad pages in one issue of culture bible The New Yorker. Agency Peterson Milla Hooks commissioned the magazine's team of illustrators to create a series of different images, all bearing the store's trademark red-and-white bullseye logo, and each celebrating an aspect of New York life. As a result of this and other upscale marketing, Newsweek described the company's logo as an "icon of affordable chic", while Newsweek called it "a retail symbol as recognizable as Tiffany's blue box".

Bob Ulrich, principal architect of Target's extraordinary expansion, passed on the role of CEO to Gregg Steinhafel in 2008, and stepped down as chairman in January 2009.

Last full revision 15th March 2017

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