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Did Target Manage Its Inventory Better in Fiscal 4Q16?

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Nov. 22 2019, Updated 6:49 a.m. ET

Target revamps its supply chain capabilities

Target (TGT) is looking to perform better in terms of inventory management. A key element of its outperformance during fiscal 4Q16 was its improved supply chain capabilities, enabling the retailer to generate higher sales and maintain the requisite in-stock levels.

Stock replenishment was particularly important, bearing in mind the strong sell-through of seasonal items in the fourth quarter. That is part of the reason that Target outperformed its sales expectations, as detailed in Part 2 of this series.

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In-stock inventory positions

According to John J. Mulligan, COO of Target, “for the fourth quarter in total, out-of-stock metrics were 20% better than last year and notably, by the end of the quarter, Target’s out-of-stock metrics were 40% better than a year ago, as the improvements we’ve implemented allowed for a faster post-holiday recovery this year.”

Target is focused on keeping sufficient inventory on hand, particularly for essential items. After the holidays, the retailer reported improvement in stock positions in every category. Another factor helping the retailer is its centralized system, which enables one view of the inventory that encompasses both stores and distribution centers. According to Mulligan, this enables the retailer (XRT) (RTH) to keep a higher in-stock position with respect to digital orders. It also helps in adding to orders fulfilled by the stores.

Inventory turnover

Target’s (TGT) inventory turnover ratio also improved, from 5.8x in fiscal 4Q15 to almost 6.0x in fiscal 4Q16. In comparison, the inventory turnover ratio came in at 3.3x for Burlington Stores (BURL), 3.9x for Dollar Tree (DLTR), 4.7x for Dollar General (DG), and 2.5x for Tuesday Morning Corp. (TUES) in their last respective quarters.

Cost efficiency

Leveraging an extensive brick-and-mortar network such as Target’s for fulfilling orders can also help keep transportation costs low. Target’s profitability has improved in fiscal 2016, which we’ll discuss in the next article.

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