Target Corp. (TGT) continues to increase its footprint in e-commerce, growing by 41% in the second quarter despite an ever-more-crowded digital-retail space populated by bigger players like Amazon (AMZN) and Walmart (WMT) . The program's acceleration, disclosed Wednesday as part of Target's second-quarter earnings release, has been a welcome change for the retailer, which had been lambasted by analysts in the past for its lack of digital presence.
"TGT is one of the most-exposed retailers in our universe to the digital threat," Wells Fargo Senior Analyst Edward Kelly wrote in a note. "Investors have been critical of management for being slow to react to the structural change, but the company now appears to be taking aggressive action."
Kelly lauded such elements of Target's digital strategy as a "ship-to-store" program, where in-store customers complete purchases that are delivered to their homes. He also praised TGT's Drive-Up service, where orders placed via Target's mobile app arrive for pick up outside of your local store. Kelly said such moves help differentiate Target from both traditional competitors and the aforementioned bigger players.
"The strategy is clearly focused on building a digital platform that leverages [Target's] existing store base as opposed to buying/building pure-play digital assets," he wrote. "We don't disagree with the company's thinking, as the cost of competing with Amazon and even Wal-Mart at this point with similar strategies would be extremely high."
Target CFO Catherine Smith described the initiative during the chain's earnings call Wednesday as a blurring of the lines between digital and in-store sales. "Our stores are fulfilling much of that 41% digital growth," she said. "And so, we're going to start talking less and less at some point about our actual 'digital' sales, because it is truly our entire business, fueled by those stores."
Even bearish Morgan Stanley analyst Simeon Gutman, who gives the stock an "Underweight" rating, said in a note that he had to "give credit where it is due" on e-commerce, calling TGT's gains in that area "stellar relative to a majority of retailers." However, Gutman added that some of Target's e-commerce gains were "likely aided by a calendar shift (extra week of back-to-school sales) and the introduction of free two-day shipping."
To be sure, a play that relies so heavily on the existing bricks-and-mortar stores and merchandise pick-ups isn't an entirely diversifying move for the company. Further, it's not entirely certain that Amazon and Walmart can't still displace Target, as their market share already exceeds Target's and doesn't rely as heavily on existing retail real estate.
And while e-commerce is accelerating at Target, it still only accounted for less than $1 billion of the company's $18 billion second-quarter sales. TGT's e-commerce volume also seems even less impressive when compared to Amazon's $52.9 billion in second-quarter sales.
Yet while Target remains well behind competitors in e-commerce and lacks meaningful market share at this point, the firm's rapid second-quarter growth in the category indicates one thing -- there's still room for TGT's e-commerce sales to grow.