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Target has opened 100 mini stores and remodeled 500 bigger ones. And it's paying off

Key Points
  • Target also says it's still on pace to open 30 small-format stores across the country each year.
  • The company expects to complete 300 additional store remodelings in 2020, putting it on track to remodel at least 1,000 locations out of its fleet of more than 1,800.
  • Target's latest earning report shows how these investments are driving traffic and sales at a time when other retailers are struggling.
Target's store remodels include new toy departments.
Source: Target

Target is surpassing major milestones this week on its store investments, days after the retailer reported earnings that blew past analysts' estimates and sent its shares surging to new highs.

Target announced Friday it has opened its 100th small-format location and finished remodeling its 500th location since it unveiled a $7 billion investment plan in 2017.

Under the plan, it has been pouring money into planting pint-sized locations in major metros like New York and around college campuses like the University of North Carolina at Chapel Hill and refreshing its larger-format shops with new lighting, fresh flooring and a redesigned grocery space. As it accomplishes these key milestones, Target is proving how the rollouts and revamps are paying off.

"We think the differentiator is going to be what the in-store experience is like," Chief Operating Officer John Mulligan said in an interview. "Even today somewhere around 90% of retail is still done in stores. The store isn't going away."

Target said it's still on pace to open 30 small-format stores across the country each year. Mulligan said he still sees room to grow in areas like New York, Los Angeles and Chicago. The company also still expects to complete 300 store remodels in 2020, putting it on track to remodel at least 1,000 locations out of its fleet of more than 1,800.

According to Mulligan, Target is learning as it goes.

It once tried to shut down an entire store for remodeling but found shoppers preferred to shop around the construction, he said. So now Target keeps stores open as it remodels them, which takes roughly three months per store. Mulligan said Target has managed to cut in half the "sales disruption" it sees during remodels. And sales are up 2% to 4% per store, the first year a remodel is complete, according to Target.

With its small-format shops — which can be as tiny as 15,000 square feet with the average one being 40,000 square feet, or a third of a full-size store — Mulligan said Target is learning how to better curate merchandise specific to each location. And it's taking these merchandising techniques to its other stores, he said. "We're localizing more."

Target has also said its smaller-format stores are twice as productive as its larger ones.

The electronics section at Target's small-format store in Herald Square, New York.
Source: Courtney Reagan, CNBC

Target's earnings this week proved the retailer is doing something right.

Sales at Target stores open for at least 12 months and on its website were up 3.4% at a time when many retailers are reporting same-store sales declines. Traffic was up 2.4%. Online sales were up 34%.

"One of the things that stands out for me is the health of our assets and the performance of our stores," CEO Brian Cornell told analysts on a call. "Target guests visit us more frequently — shop more categories. They are enjoying the changes we have made in the store experience."

In its bigger stores and the smaller ones, Target is making each department feel more like a boutique or a store within a store. The beauty aisles mimic a Sephora, for example. The electronics space feels like a Best Buy. You might even mistake the toy area for a Toys R Us in its heyday. And the clothing areas, for adults and kids, have more mannequins decked out in Target garb, organized by brand, to look like mini apparel shops.

Analysts say Target is more appealing to consumers today because it serves as a reliable one-stop shopping destination, for makeup, cleanings supplies, snacks and everything in between. The company is arguably more "recession-proof" because of this, too, since it sells necessities, not just discretionary goods. It's also clearly investing in bricks and mortar at a time when other companies aren't. Thousands of other retailers' stores are still going dark.

"This really speaks to what Target is good at ... we need to bring newness," Mulligan said.

As it opens new stores and remodels old ones, Target is trying to perfect its supply chain to allow it to fulfill online orders from the back of stores and offer options like curbside pickup. Target said that during the latest quarter purchases using its same-day delivery services, including curbside and in-store pickup, nearly doubled from a year ago and accounted for about 75% of digital growth.

This week's "solid print is evidence that continued investments in product newness, store remodels, and fulfillment are bearing fruit with the market clearly rewarding Target ... for recent success," Jefferies analyst Christopher Mandeville said in a note to clients Wednesday.

Citi analyst Paul Lejuez also issued a note, upgrading the company to buy from neutral and saying Target's stock could rise another 20% "as the company continues to prove to the market that it is a winner in this retail landscape."

Target shares, valued at $53.8 billion, are up more than 55% this year.

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