Target Corp. has had an impressive run of growth lately, reporting Tuesday that its comparable sales in the latest year increased the most since 2005. Amid that spurt, though, investors have fretted at times about how the big-box retailer’s transformation efforts have weighed on profitability.
Those doubters should be soothed by what they heard from Target executives in a Tuesday investor presentation, which made clear that the retailer’s gross margin has been dented for all the right reasons, and that it has a solid vision for building its e-commerce business in a healthy way.
CFO Cathy Smith said half of the 40-basis point decline in full-year gross margin was driven by the mix of products sold, with a heavier component now comprised of baby products and toys. This should be shocking to no one, as onetime Toys R Us and Babies R Us customers were up for grabs after those chains’ liquidation. Given that Target’s comparable sales were up 15 percent in 2018 in its baby and toy segments, it apparently did a good job filling the void. In fact, I’d argue Target would have failed if it didn’t get a gusher of business from the disappearance of two big competitors in that space.
Another reason for the decline in gross margin was slashing prices on everyday items, an essential undertaking to compete effectively with Walmart Inc. and Amazon.com Inc. A third was an increase in digital-fulfillment costs, reflecting a surge in online orders and initiatives such as promising free two-day…