A Year After Shake-Ups: Where Walmart, Target Stand
Change doesn't come easy -- particularly when you're trying to move the needle at a company that rakes in hundreds of billions in annual sales.
Still, when new CEOs took over at two of the country's largest retailers within a three-day time span last year, experts knew major changes were in store for the industry.
As Greg Foran and Brian Cornell mark their one-year anniversaries at Walmart U.S. (WMT) and Target (TGT) next month, the two are looking to continue building on the frameworks they've put in place, and set their companies up for future growth.
Although both retailers cater to a still-struggling consumer, the financials are starting to trend in their favor. Both big-box stores posted two consecutive quarters of traffic gains in the most recent periods. They've also recorded three straight quarters of same-store sales gains, following a string of flat or lower results.
Target, however, has delivered an upside surprise to Retail Metrics' quarterly revenue and earnings estimates for the past three quarters, whereas Walmart has disappointed twice on revenue and once on profit.
As a result, Target's shares have climbed 36 percent under Cornell, while Walmart's shares have dropped roughly 4 percent during Foran's tenure.
"They've done a nice job," said Craig Johnson, president of Customer Growth Partners. "With the dramatic changes [Cornell has] made... you're seeing the rudder turn and you're seeing a significant change there."
"Walmart has a bigger turning radius than Target," Jonson added.
Target Rips Off the Bandage
To Moody's analyst Charles O'Shea, Target's biggest success under Cornell came from one of the biggest failures in its history: Canada.
Just five months after Cornell took control, he announced that the company would incur a $500 million-plus cash cost to shutter its 133 stores there. The locations, which fell flat with Canadian consumers due to their high prices and empty shelves, weren't expected to be profitable until at least 2021.
"It's almost mind-boggling to see what happened up there," O'Shea said. "That was priority No. 1."
Closing up shop in Canada was one of a string of tough decisions Cornell has made, Johnson said. To reduce costs and speed up the decision-making process, the CEO in March said the company would cut several thousand jobs in a $2 billion savings plan. And just last month, Target parted ways with longtime merchandising chief Kathee Tesija.
"Fixing the merchandise is a big deal," Johnson said.
Part of what has traditionally separated Target from its low-price competitors was its reputation for cheap but chic items. But as other stores started a race to the bottom in the post-recession years, even the bull's-eye retailer has admitted it focused too much on the "pay less" portion of its "expect more, pay less" proposition.
%VIRTUAL-pullquote-There are so many fronts that you have to fight on.%Updating the stores' merchandise is at the core of one of Cornell's biggest initiatives -- prioritizing what the company refers to as its four "signature" categories: style, baby, kids and wellness. Analysts agree Target has made strides in once again differentiating merchandise, including its blockbuster limited-time collection with Palm Beach-inspired fashion house Lilly Pulitzer (OXM).
But there is still work to be done, including finding a new chief merchant.
Cornell, who comes from the consumer packaged goods industry, has listed grocery as another of his major priorities, and recently hired former PetsMart and Safeway executive Anne Dament to lead the charge.
Accelerating the food business, which together with pet supplies accounts for 21 percent of Target's sales, could deliver a significant traffic boost to the retailer, as consumers shop for food five times as often as everything else, O'Shea said.
But it's also a difficult business to get right -- particularly as Walmart zeros in on the category.
Target is also hoping its recent partnership with CVS will boost visits to its stores. Through this deal, Target last month sold its pharmacy business to CVS Health (CVS), which could provide it with millions of repeat customers.
"Target could potentially realize incremental sales as it picks up incident front-end purchases that customers used to make at [a] CVS location," Cowen & Co. analyst Oliver Chen wrote in a note to investors.
That's not to say Target is taking its foot off the gas on the Web. Although O'Shea said its online operations still lag competitors such as Walmart or Best Buy (BBY), it's improved its tablet app, and its Cartwheel savings app continues to offer shoppers value.
O'Shea said he's not sure, however, how much longer Target -- or Walmart for that matter -- can continue offering free shipping promotions in an effort to steal business from Amazon.com (AMZN).
"There are so many fronts that you have to fight on," O'Shea said.
Walmart Going Back to Basics
Turnaround at Walmart U.S. has been understandably slower. With $288 billion in annual sales, the retailer's largest unit alone pulls in twice as much revenue as the second-biggest U.S. retailer, Kroger (KR).
Though Walmart's sales and profits have failed to break out during Foran's tenure, the retailer recently reignited the minimum wage debate by boosting hourly pay for 500,000 of its U.S. workers to $9 an hour. Although experts agreed the move would dilute its profits, it should "start to bear dividends down the road," Johnson said.
"When you pay people just minimum wage or close to minimum wage, you're going to have a turnover problem," Johnson said.
Now, by incentivizing store associates to stick around longer -- and providing additional training to managers -- the stores' operations should improve. That includes everything from keeping its shelves stocked, having enough shopping carts at the front of the store, and cutting down on the long lines that have frustrated Walmart shoppers.
Improving operations in the retailer's fresh food business is particularly important, as grocery accounts for more than half of its revenues. This is something the retailer has to get right, since Target sets the category in its crosshairs.
Perhaps Walmart's biggest opportunity in this area is its small-format Neighborhood Market stores, which are located in more urban areas and skew toward grocery. These stores, which now account for more than 10 percent of the retailer's U.S. store count, offer shoppers a low-cost alternative for everyday items that they need during the week. They stand in contrast to its supercenter format, which cater to shoppers who want to stock up on bulk items.
"It's hard to argue with all those points of distribution," O'Shea said. "You take advantage of the fill-in trip and you also become a competitor to every other retailer out there."
"Greg is really focused on that."
Johnson said he would like to see Walmart further accelerate its rollout of small-format stores, though they still have some operational issues. Problems include such retail basics as having enough handcarts to accommodate for small trips, and staying in-stock on fresh foods, Johnson said.
These examples fall in line with the priorities Foran outlined at Walmart's investor meeting in April. First on the list: Improve the customer experience. As such, he acknowledged the retailer needs to do a better job getting inventory levels right and improving the flow of product to the selling floor.
Stores have also started to reduce the price on products that are nearing their expiration date, which he estimates will deliver $500 million in annual savings. And moving forward, Foran plans to improve the lighting, layout and temperature in some of its stores.
Although that doesn't mean the retailer will lose focus on savings, Johnson said Walmart can't rely on price alone to get people in the door.
Foran echoed that sentiment back in April.
"To be really frank, if we went out there and started shouting about price today, I don't think you'd get a great return on your investment," he said.
"I think customers would want to make sure that we are in stock, that the store was clean, including the toilets, that fresh was reasonably fresh and that the service from the front end was appropriate."