Stock Spotlight

Target's growth hits the mark

 

Many retailers absorbed body blows during the pandemic, as stay-at-home orders kept shoppers away from the shelves and job disruptions eroded consumers’ purchasing power. But not Target ($242; TGT), which joined the Buy and Long-Term Buy lists in the Aug. 9 issue. Target grew sales 11% in the April 2020 quarter and at least 10% in the five subsequent periods. Target grew sales 10% and per-share profits 8% in the July quarter.

Reasons for optimism

Why did Target’s top-line growth prove so resilient? Here are four reasons, all of which bode well for the company’s ability to expand both revenue and profits consistently.

1) Essential products. Target generates about 20% of its revenue from food and beverages and another 27% from beauty products and household staples such as paper towels, diapers, pet food, and toothpaste. Target’s broad product selection provides some insulation against even the most surprising and disruptive external events.

2) Store-centric shipping. Target’s distribution network centers around its 1,900 stores rather than regional warehouses. In the April quarter, Target satisfied more than 95% of its sales from in-store inventory, allowing for faster and cheaper delivery; most Americans live within 10 miles of a store. In the 12 months ended May, operating profit margins rose to 11.0% versus 9.3% three years ago.

3) Share gains. Strong brands weather storms. Target gained $1 billion in market share during the April quarter — the same as its gain a year earlier, in vastly different conditions. Market share rose an estimated $9 billion during fiscal 2021 ended January. The company has grown market share consistently in recent years, and we expect that trend to continue.

4) Engagement. Target’s investment in its digital network has paid off in both customer count and average transaction size. The company says customers who shop both online and in stores spend four times as much as store-only shoppers and 10 times as much as online-only shoppers. In fiscal 2021, Target added 12 million multichannel shoppers.

Target grew comparable-store sales 18.0% in the April quarter, up from 0.9% during the same period last year. In contrast, digital comparable sales rose 50% in the quarter, down from 141% a year ago, during a period when online shopping boomed. Digital sales accounted for 18% of revenue in the last six months.

Parting shot

Despite its broad coverage on Wall Street, Target consistently surprises to the upside on profits, topping the consensus in ten consecutive quarters by an average of 33%. While the magnitude of surprises will probably shrink in a less-confusing economic environment, Target makes a habit out of outperforming.

In June, Target boosted its dividend 32% to a quarterly rate of $0.90 per share, equating to a 1.5% yield. This hike marked the 50th consecutive year of higher payouts, though Target hasn’t announced such a generous increase in 11 years.

Target Corp., 1000 Nicollet Mall, Minneapolis, MN 55403, (612) 304-6073, www.target.com.

 

 

 

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