The $2 Billion Question: Will Target's Cost Cutting Make it a Winner Again?

By Markets Fool.com

No matter how large and prominent a company might be, $2 billion is an awful lot of money. That's the amount Target aims to save over the next two years as part of a broader initiative to boost results. For a firm that once grew so robustly, its recent sales and profitability figures have been lackluster. Can the new strategy lift Target out of that rut and return it back to meaningful growth?

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Save, then spend
In a sound bite, Target plans to slim down, push selected product lines, and draw more sales from the Internet.

The former will come from a set of measures that will ideally add up to that $2 billion. Unfortunately for many of the company's employees, one of the main ones is a restructuring program. Around 1,700 employees at the company's headquarters in Minneapolis have already been let go, and roughly 1,400 open positions have been eliminated.

A lighter bureaucracy will be tasked with implementing the other cost-saving moves. According to a Target press release, these will be drawn from areas including "operations, technology and process improvements; supply chain and sourcing efficiencies."

And how will that $2 billion in savings be spent? To begin with, on boosting four categories of goods -- style, baby, kids, and wellness. The company says it will "invest in these areas with a focus on newness and differentiation." Those are already significant lines for the retailer -- in 2014 they combined for around 25% of its total sales.

Other store aisles will see makeovers in terms of the products they offer. Target singled out its grocery department as one area in need of overhaul. It plans on devoting more shelf space there to items popular with younger shoppers -- organic foods, for example, and locally sourced products -- at the expense of packaged and processed items.

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Lastly, and perhaps most importantly, the company will plow capital into its efforts online, particularly in mobile. The company's chief strategy and innovation officer Casey Carl has said that "mobile is truly the new front door to Target."

He isn't kidding. In 2014, mobile traffic increased by a hefty 44%. There's much more room to grow, as total online sales comprised only around 2.5% to 3% of the company's total take for the year. Plus, customers who buy from Target both online and in person spend around three times as much as an in-person only shopper.

Grabbing for growth
Target could use the growth a properly executed, money-saving and revenue-building initiative might bring.

The company's sales have been basically stagnant over the past three fiscal years. Meanwhile, 2014's net profit would have declined on a year-over-year basis even without the $4 billion loss the company booked for its disastrous foray into Canada. This, incidentally, plunged it deep in the red to the tune of $1.6 billion.

Meanwhile, in the five fiscal years to 2014, the company's costs of goods sold grew by nearly 10%. This line item outpaced revenue, which advanced by just under 8%.

A narrowed focus on popular product categories, then, and a concentration on e-sales seem like sensible moves to me. Several years ago Target drifted away from its emphasis on chic goods at affordable prices, floating into the vague, all-things-to-all-customers space. By doing so, it was going against bigger general retailers like the massive Walmart and the very well managedCostco Wholesale .

That's a hard game to win. And as evidenced by its uninspiring growth Target hasn't been a particularly effective player.

TGT Revenue (TTM) Chart

TGT Revenue (TTM) data by YCharts

Moving Target
Target's save-and-spend program was announced earlier this month, and painted in only very broad strokes by the company. We'll get a better idea of the finances involved when and if management provides more detail about the savings being accumulated, and how they're allocated.

Nevertheless, the initiative is a good, well-considered move that can theoretically leverage those monies into powerful sales increases. So on paper, at least, it looks very encouraging. What matters now is execution.

The article The $2 Billion Question: Will Target's Cost Cutting Make it a Winner Again? originally appeared on Fool.com.

Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.