Here’s what Target needs to do to get its act together

Target (TGT) has to clean up its operational aisles if it's to close the financial gap with surging rival Walmart (WMT).

"I'm worried about Target getting its act together," said retail expert and investor Jeff Macke on Yahoo Finance's 'Opening Bid' podcast (video above; listen in here).

Macke knows a thing or two about the history of Target.

His father was Kenneth A. Macke, the former chairman and CEO of mall operator Dayton Hudson — the forerunner of Target. The elder Macke rose from sales trainee to chairman and CEO of Target, then a division inside of Dayton Hudson.

He went on to lead the entire company over the span of a 33-year career, and is seen as the creator of modern day Target.

The younger Macke vividly recalls going up and down Target aisles with his dad to spot potential operational troubles and opportunities. He was maniacal about efficient operations, Macke recalls.

But the Target of today continues to endure some challenges.

In May, the company reported a surprise earnings miss for the first quarter. Chairman and CEO Brian Cornell cited cost-inflated food and household essentials as culprits, adding that inflation was “putting a strain on the consumer wallet.”

While consumers sleuthed out cost-effective staples like bread, eggs, and milk, interest in discretionary items wavered once more.

To remedy shifting consumer demands, Target has begun lowering prices on consumer staples, with around 5,000 items up for discount by year-end. This move could boost foot traffic, encourage longer browsing, and hopefully result in more sales.

Macke offers up a few other suggestions to Target execs.

First, manage the shrink — or retail theft — factor.

According to a report by the National Retail Federation (NRF), the average shrink rate rose to 1.6% in fiscal 2022, up from 1.4% in fiscal 2021. “When taken as a percentage of total retail sales in 2022, that shrink represents $112.1 billion in losses,” wrote the NRF.

Target execs said throughout 2023 that shrink had damaged profit margins substantially. Another effect of theft includes stolen goods being offloaded by third-party sellers.

Macke said Target became, well, an easy target in this frenzy. As “the friendliest discount store, it was not a setup that prepared them for that rampant shopping spree.”

The company needs to cultivate a cheerful shopping environment that deters theft, added Macke. Locking away items and putting entire aisles of merchandise behind plastic might not be the best way, but take inspiration from Costco (COST), which uses associates to check guests in and out seamlessly.

While executing on this, Target needs to stay inclusive and mindful — but also practical.

Compared to the Pride launch that received its own Wikipedia entry last year, it’s been a pretty mellow June for Target. Recall in 2023, the release and the company’s response to consumers put it in hot water with conservatives and liberals alike.

As Target looks forward, Macke said the retailer should aim to execute well on its core competencies, and continue to build out its Circle rewards program.

In April, Target launched Circle 360, a membership program that costs $99 a year. The program offers unlimited free same-day delivery for orders over $35 in as little as one hour, among other perks.

It competes with Amazon (AMZN) Prime and Walmart+ paid membership programs.

"That's where Walmart has separated itself," Macke said of Walmart+.

Well there and its financials and stock price.

Target's same store sales dropped 3.7% year over year in Q1, compared to a 3.8% gain for Walmart. While Target's earnings fell 1% in the quarter, Walmart's popped 22%.

Over the past year, Target shares are up 7%, underperforming the S&P 500's (^GSPC) 25% gain. Walmart's stock has jumped 32%.

"We think Target can turn traffic positive and ultimately get margins to 6%. It’s a question of how long, the investment needed to get there, and what the market should pay for it. Walmart still appears to have the share gaining momentum to us," said Evercore ISI analyst Greg Melich in a client note.

The buy now, pay later industry continues to change how consumers pay for goods and services. Affirm (AFRM) co-founder and CEO Max Levchin shares what his company is up to with Apple (AAPL) on this front on the 'Opening Bid' podcast. Listen in below.

Grace Williams is a writer for Yahoo Finance.

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