3 Reasons Target Just Destroyed Estimates Again

Shares of Target (NYSE:TGT) are climbing again after the company delivered another blowout earnings report. The big-box chain has been arguably the biggest retail winner during the pandemic and the latest results show why. 

Comparable sales in the third quarter jumped 20.7%, outpacing peers like Walmart and Costco Wholesale, and showed growth in both in-store sales and digital. Unlike most retailers, Target also saw store traffic increase, even while digital comparable sales jumped 155%. Revenue in the period rose 21.3% to $22.6 billion, easily beating analyst estimates of $20.9 billion. Profits also jumped as the company saw fewer markdowns and leveraged the sales gains against its fixed-cost base. As a result, operating income nearly doubled to $1.9 billion, and adjusted earnings per share surged from $1.36 to $2.79.

Nearly every essential retailer has experienced a tailwind from the pandemic, but Target is outperforming just about all of its retail peers, and, unlike home improvement retailers like Home Depot and Lowe’s, it’s making gains that will last beyond the pandemic. Let’s take a look at how Target was able to blow away expectations once again.

The grocery department at a Target store

Image source: Target.

1. Target operates a seamless omnichannel experience

Perhaps no retailer has done more to dovetail the in-store and online shopping experiences than Target. The company has invested heavily in same-day fulfillment services, like drive up, order pickup, and same-day delivery with Shipt, which together delivered 217% year-over-year growth in the latest quarter, adding $1 billion in incremental sales. Drive-Up alone saw more than 500% year-over-year growth in the quarter.

These services have proven to be popular with customers as they were growing fast even before the pandemic, and they also leverage Target’s stores, which are located within 10 miles of 75% of the U.S. population. In the third quarter, stores fulfilled more than 95% of total sales, including more than two-thirds of digital sales.

Using its store base that way, especially for pickup orders, is more cost-effective than shipping from a distribution center, and gives Target an advantage over peers like Amazon, Walmart, and Costco that don’t have the same store-based fulfillment strategy. That’s part of the reason why Target is able to generate a wider profit margin than those competitors.

2. Target has a well-balanced product portfolio

Target is unique among large retailers in its category assortment. Like Walmart and Costco, the company sells a range of products like groceries, apparel, home goods, and electronics, but Walmart and Costco both derive a majority of their sales from groceries. At Target, that number is closer to 20%, and its sales are relatively evenly divided among groceries, apparel, home goods, essentials like health and beauty, and hardlines such as electronics and toys.

At Target, groceries aren’t the core of the business and act as more as a driver for customer traffic to encourage purchasing higher-margin products in areas like home goods and apparel. All of its categories showed strong growth during the period from apparel, which was up nearly 10% in the period, to electronics, which jumped more than 50% as customers continue to stock up on gadgets for working and playing from home. Notably, the gains in apparel have come as overall apparel sales have fallen sharply, indicating the company is gaining market share. 

3. Target’s unique niche is helping it grab market share

The pandemic has shaken up routine shopping habits, leading more consumers to shop online and to consolidate trips at stores like Target. But Target’s wide-ranging product portfolio and omnichannel execution has given it a unique opportunity to capture market share from stumbling peers like Gap, which has announced plans to close hundreds of stores. Target said it’s already gained more than $6 billion in market share this year, up from an estimate of $5 billion in the second-quarter report.

As department store chains like Macy’s and mall-based chains like Gap falter, Target looks set to continue winning market share as its model offers much of what shoppers like about department stores, like the brand variety and range of products, without the drawbacks.

In fact, Target has made recent moves lately that seem designed to grab more market share from department stores. It said in August it was expanding its partnership with Levi’s to sell its red-label jeans, and the company is teaming up with Ulta Beauty to add more than 100 of its shops inside Target stores. Those moves, along with changing customer habits from the pandemic and the fallout elsewhere in the retail industry, should help Target build on those market share gains even when the pandemic is over.

The takeaway

Management did not provide guidance for the key fourth quarter due to uncertainty around the crisis, but the company is executing in every facet of the business, and its performance is on fire. After the latest profit surge, the stock looks like even more of a bargain, and analysts are likely to ring in with upgrades and price target raises over the coming days, which could lift the stock further.

Expect another round of impressive numbers the next time Target checks in as the company looks well-positioned for the duration of the pandemic and its aftermath.

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