Is Target Hastening the Decline of Department Stores?

Markets Motley Fool

Target (NYSE: TGT) has been working on a rebound this year as the overall retail industry struggles with changing consumer trends. Target has had success promoting its online store and offering new delivery options for  shoppers. Another key strategy has little to do with technology, though, as Target is gunning for the most beat-down segment of the retail industry.

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The death of the department store?

The overall retail industry has had a great 2017, posting sales 3.9% higher than last year through October, according to the U.S. Census Bureau. Not everyone is getting in on the consumer party, though. Many brick-and-mortar stores have struggled, and department stores have been hit particularly hard.

The department store segment of the industry saw sales decline 2.8% through October. Evidence of those struggles can be seen at stores like Macy's (NYSE: M) and Sears Holdings' (NASDAQ: SHLD) Sears and Kmart, stores once held in high esteem but that have slowly fallen out of favor over the years. Clothing retailers have fared a little better, managing a 0.6% increase in sales in 2017. But the story has been similar as shopping mall traffic has ebbed, forcing many companies to shutter locations or close down entirely.

Target going for the kill

Target, which dwells somewhere between the discount retailer model of Wal-Mart (NYSE: WMT) and the old department store model, is trying to maneuver itself further into the realm of the latter. Its new online strategy is all about competitive pricing and helping customers shop conveniently, but management still sees value in its physical locations.

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At the heart of that idea has been the launch of new brands exclusive to Target, a big push that gathered new momentum last year. Thus far, the company has released nine exclusive brands since the start of 2016.

Brand

Description

Pillowfort

A new home decor line for kids' bedrooms.

Cat & Jack

Basic line of clothing for kids.

Art Class

Kids' clothing line emphasizing creativity and self-expression.

Cloud Island

Decor for babies' rooms and nurseries.

JoyLab

A new lineup of fitness and activewear for women.

Goodfellow & Co.

Apparel and accessories for men.

A New Day

Apparel and accessories for women.

Project 62

Modern home decor and accessories.

Hearth & Hand with Magnolia

A home decor line in partnership with Chip and Joanna Gaines from HGTV's Fixer Upper TV show.

In tandem with the new brand launches, Target dropped two of its most popular clothing lines, Merona and Mossimo. Both were quickly replaced with the exclusive and more focused Goodfellow brand for men and A New Day for women. The hope is that the change will differentiate Target from the homogenous clothing options offered by its department store rivals, as well as the cheaper lineup typical at the value big-box store.

Target stores are also being remodeled to better reflect the new strategy. The new format has two entrances, one geared for the quick trip centered around groceries, household essentials, and those picking up items they ordered online; and the other entrance for the shopper who wants to peruse new in-store displays for Target's new exclusive brands.

Off to a good start

Those new exclusive brands are an attempt to elevate Target's image as a place to stock up on the latest clothing and home fashions. The strategy also looks like the company is moving further toward the department store model for its physical locations.

So far the changes are yielding positive results. While many brick-and-mortar stores are losing ground to online rivals, Target reported a 1.4% increase in traffic during its third quarter. On the year, traffic is up 0.9%, reversing a slide in in-store traffic that kicked off 2017.

Target will be remodeling stores over the course of the next few years, and to some extent the success of the strategy hinges on the continued decline of department stores as Target bets that some shoppers still want a physical store for discretionary items to complement the convenience of online shopping. The continued closing of brick-and-mortar locations would suggest there are still too many options out there.

With that being the case, Target's moves this year could be hastening the decline of the old department store model. It's still too soon to say it's a winning strategy, but early indications are that the retailer should keep pushing.

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Nicholas Rossolillo owns shares of Target. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.