Photos: Target
Can Target afford to pay (not pay) a $15 minimum wage?
Target has announced that it will extend a temporary $2 an hour wage hike, double-overtime pay and other benefits to its associates in recognition of their efforts during the novel coronavirus outbreak through July 4. The announcement comes in the same week the retailer reported big gains in same-store sales while seeing its first-quarter profits take a hit from the higher wages paid associates and a slowdown in sales of higher-margin items, such as apparel.
The retailer posted a same-store sales gain of 10.8 percent during the period, which includes 141 percent sales growth from Target’s digital channels. Its operating income, however, fell 58.7 percent year-over-year.
Target reported market share gains across its five core categories in the first quarter and CEO Brian Cornell remains bullish on his company’s outlook as states slowly begin to relax stay-at-home orders/guidance.
“Our team showed extraordinary resilience as guests relied on Target as a trusted resource for their families. With our stores at the center of our strategy, and a significant investment in the safety of our team and guests, our operations had the agility and flexibility needed to meet the changing needs of our business,” said Mr. Cornell. “With the dedication of our team, the benefit of a sustainable business model and a strong balance sheet, we are confident Target will emerge from this crisis an even stronger retailer, with higher affinity and trust from our guests.”
Most of Target’s first-quarter same-store sales growth came from its digital operations with stores fulfilling 80 percent of orders placed online. Comp sales grew from a 33 percent increase in February to 282 percent in April. The chain’s same-day services, including order pick-up, drive-up and Shipt deliveries, grew 278 percent during the quarter, accounting for roughly five percent of total comp sales growth.
The chain’s impressive sales growth did not seem to inspire investors, however. Its stock price rose less than one percent in premarket trading, CNBC reports. The lower profits posted by the chain is likely a concern following Target’s announcement that it is extending its temporary pay hikes through Independence Day. Another potential concern for investors is the pledge made by Target last year to lift its minimum hourly wage to $15 by the end of 2020. That is the effective rate it is currently paying hourly workers who have come on board at its current $13 an hour minimum.
The retailer is looking to offset higher costs by increasing market share and sales of higher-margin items, notably apparel, as more consumers venture from their homes and gradually return to stores. Target, long known for its fashion designer collaborations, announced earlier this week that it will launch “The Designer Dress Collection” with more than 70 dresses from LoveShack Fancy, Cushnie and Lisa Marie Fernandez.
In an effort to maintain safety for associates and customers in stores, Target is initially launching the collection online on June 6. The line will become available at the chain’s stores on June 15.
Discussion Questions
DISCUSSION QUESTIONS: What is your take on Target’s first-quarter results and what do you expect of the retailer over the next year? Will paying a higher hourly minimum wage help or hurt Target in its competition for customers with other retailers?
Poll
BrainTrust
Mark Ryski
Founder, CEO & Author, HeadCount Corporation
Paula Rosenblum
Co-founder, RSR Research
Target is doing very well and I expect to see them continue to perform well through this year and beyond. While paying higher minimum wages will put pressure on profitability, I believe Target management is making the right bet – they’re putting their money on their people and I think that will pay dividends in the long run.
Target will continue. The company’s biggest problem isn’t its employees, it’s the inventory management system. Having used their grocery delivery via Shipt and having had the shopper send me photos of empty shelves though the website indicated otherwise, I had firsthand experience.
All the walking around costs profit.
It’s a crazy time to recommend this in some ways, but I think Target has to make some major tech investments FAST. Whether that be in mini-fulfillment centers or better short-term forecasting systems, the profits are being sucked out the window. Employees are totally important in this COVID-19 age. Paying them is good, and an incentive. Helping them help the customers is even better!
I agree completely. The retailers I’m talking with are looking at extensive technology investment right now. IT staffs are extraordinarily busy. And kudos to Target for rewarding their associates.
I don’t know – the cost of changing operations with labor, capital improvements, and changes in processes to combat the pandemic have eaten into profits. I think they will have to continue to offer competitive pay for what seems (for now) like the long term.
Target had great first-quarter sales numbers, largely thanks to existing customers stocking up on essentials which resulted in bigger basket sizes and lots more new shoppers visiting stores and sites. However, profits were crimped as there was a massive skew to lower-margin products in groceries and electronics, and higher-margin categories like apparel were shunned; product fulfillment costs also rose as online sales soared. Underlying costs were actually not too bad and selling, general and administrative expenses fell as a proportion of sales. This suggests that Target can probably afford to pay more provided it keeps sales elevated and switches back to a higher margin mix.
Sounds like Target wants to maintain the ability to fulfill 80 percent of online orders in-store. Because that’s a helluva lot cheaper than shipping. So it’s not paying more in payroll that is the issue. It’s paying less for overall sales and last-mile execution.
Having a singular focus on quarterly numbers can be misguided and damaging. I think Target has done well in extending the $15 pay through July, even if it leaves Wall Street unimpressed. Being able to sustain $15 and preferably a dollar more could be a key differentiator from Walmart – from the point of view of conscious consumers as well as attracting talent. Costco raised minimum wage to $15 last year. Walmart’s stated goal is to reach there by the end of 2020.
I believe that Walmart’s minimum wage for starting employees in stores is $11 an hour, not counting current hazard pay. Workers in its distribution centers, again not counting hazard pay, start between $17 and $18 an hour based on Reuters’ reporting. I’m not aware of Walmart, as Target has done, pledging to start workers at $15 by the end of this year. Walmart does, however, frequently make a case that bonuses and other forms of compensation/benefits it offers to workers make it competitive for labor in the market. I suppose, depending on where you stand, paying lower wages could either a competitive advantage or disadvantage at the present time. It’s clear with so many out of work that it’s no longer a job-seekers market as it was before the pandemic hit.
You are correct George. I misread the report. Given Target is already committed to $15 by the end of 2020, it is probably moot. While the supply could be abundant, other sources of competition are also emerging – Instacart, other delivery services, and increased hiring at Amazon. As retail opens up, some portion of the workforce would be employed again.
Like Walmart, Target was in the right place at the right time and was able to take advantage of it. Like Walmart, most of the increase was due to over-buying. While I am not ready to predict that sales increases will go negative as shoppers work off their in-home inventory as many will use it up at a faster rate at home just because it is there. (How much of marketing is based on getting consumers to fill their pantries?)
With regard to wages, I don’t think it will hurt its competition for customers one iota. The reality is that shoppers are completely unaware of what workers make and I will go one further and say that most shoppers, relative to their shopping, don’t even care — even if they are strong political advocates of increasing the minimum wage. (Please, forgive my cynicism.)
Paying higher wages will, in the short term, give Target a positive PR boost and help keep the stores staffed. In the long run, it is going to be tough on the bottom line. Even though I think companies like Target would like to pay more. The bottom line does not support that kind of wage. Just look at the sales growth and the fact that most of this was on track but look at the hit to the bottom line.
Now, look at Walmart. They pay bonuses. Good PR but it doesn’t show up as an ongoing labor cost.
Of course it should help them; lower employee turnover, more efficient employees, which will lead to a better customer experience in their stores.
So far I am not seeing the type of labor and type of experience in their stores, that I would expect to see with these higher wages. So I am not sure if they are getting what they are paying for with this. Employee dress code is quite sloppy (20 years ago the employees all looked uniform, now they have various different red shirts, different shades of red, some with collars some without, etc. and same goes with the khakis before they were all the same now they are various shades, some are capris, etc.).
What I am seeing is their in-store shelf pricing is about 20% above Walmart on various grocery, drug/HBA, and household items in-store. However, if you order through the Target website and do a pick up (or ship to home if they’ll let you), then those items will be priced the same as Walmart’s store price.
I also think Target is pushing toward a sales mix of the higher margin non food items and basically at this point is running its food and consumable operation as more of a convenience operation figuring people will pick a few food or consumable items up while they are in the store for other higher margin clothing or decor items.