Target earnings preview, TGT focuses on grocery department

On May 16, 2023

About 21% of Target’s annual sales come from the food and beverage category, but its grocery aisles have taken on added importance as shoppers buy fewer discretionary items.

Melissa Repko | CNBC

For many Americans, a trip to Target brings to mind a shopping cart filled with throw pillows, makeup or a cute outfit.

The retailer wants more customers to think of it when checking off the grocery list, too.

Only 21% of Target’s annual sales came from food and beverage in the most recent fiscal year, according to the company’s financial filings. That’s a sharp difference from rival Walmart, which gets nearly 60% of its annual sales from the grocery aisles.

Yet as inflation-wary shoppers watch their budgets and focus on needs instead of wants, grocery has gained importance as a driver of foot traffic. Investors will learn this week if Target could help make up for softer sales of apparel, electronics and home goods by selling more boxes of pasta, gallons of milk and cartons of eggs. The company will report earnings before the bell Wednesday.

Target will post results as the company’s stock has fallen, driven in part by challenging pandemic comparisons and its own inventory missteps. Shares of Target closed Monday at $160.57, down nearly 30% from its 52-week high.

The big-box retailer also hopes by drawing shoppers for essentials like gallons of milk, it can nudge purchases of discretionary items that shoppers otherwise would not have bought.

“It’s actually a gateway to the rest of the store,” Chief Food and Beverage Officer Rick Gomez said in an interview with CNBC. “It drives traffic to the store. It drives traffic to our site. And then while they’re picking up what they need food- and beverage-wise, they’ll browse through the rest of the store and maybe pick up a few things at Ulta [Beauty at Target] or a few things in apparel.”

A ‘Tarzhay’ spin on groceries

On a recent trip to a Minneapolis area grocery store, Gomez surveyed displays of colorful fruits and vegetables. Nearby, shoppers could order freshly sliced turkey at the store’s full deli counter or order a custom birthday cake at a bakery.

The store captures Target’s grocery ambitions, even though it offers a much larger mix of food than many of the retailer’s other stores. The retailer’s stores vary in size and so do its grocery departments.

Since stepping into his food and beverage role a little over two years ago, Gomez has overseen Target’s efforts to raise the quality of the grocery department. He said that began with some tough truths: Customers weren’t satisfied.

“We were doing focus groups and one of our guests said, ‘You know, I know Target sells food and beverage, but it kind of feels like an afterthought. It feels a little bit like a bolt-on. It doesn’t have ‘Tarzhay magic’ that the rest of the store has,” Gomez said.

“It was a little disheartening, but rather than get frustrated and get disappointed about it, we said, ‘You know what, let’s use that as a rallying cry,'” he said.

Target…