How Target and Salesforce Crushed Expectations

A couple of impressive earnings reports dropped Tuesday: Investors were quite happy with Target's holiday quarter, and based on its surging growth, they should have loved salesforce.com's (CRM -1.10%), too. But the responses to the two companies were not so synchronized. While Wall Street rewarded the retailer for its phenomenal comp sales and digital sales growth, it dinged the enterprise software company for...well, it's complicated.

In this MarketFoolery podcast, host Chris Hill and analyst Abi Malin talk about Target's (TGT -0.54%) e-commerce strength during CEO Brian Cornell's tenure, why analysts feel that Salesforce management is too overconfident in its outlook, and more. They also take a dive into the current -- and future -- state of the rapidly growing food delivery sector.

A full transcript follows the video.

This video was recorded on March 5, 2019.

Chris Hill: It's Tuesday, March 5th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, New Orleans' own Abi Malin. Thanks for being here!

Abi Malin: Thanks for having me!

Hill: I know you're not from New Orleans, but, as you were talking about before we started taping, it's Fat Tuesday. Happy Fat Tuesday to everybody out there! You went to school in New Orleans. We'll get to that because I'd like to learn a little bit more about Fat Tuesday. But we have earnings to get to.

Malin: We do.

Hill: We're going to start with Target. Fantastic holiday quarter. Profits and revenue came in higher than expected. Their digital sales continue to climb. Stock up nicely today.

Malin: The stock is up nicely. As you mentioned, this is their fifth consecutive year of digital sales growing at a greater than 25% clip, which is actually phenomenal for them. But overall, Target has continued to thrive even in the space of flagging retail, and I think part of that is tempered expectations from analysts. I don't think anyone was expecting that Q4 comp sales were 5.3%, including in-store sales up 2.9% and digital sales up 31%. Those numbers are just phenomenal, especially given the landscape of retail. 

Hill: Yeah. The thing that stood out to me was that, that same-store sales number coming in higher than 5%. For a retailer of this size, I thought it was great. I was a little surprised when I went back over the last couple of years, looking through the various places that this stock has visited. I think of Brian Cornell, the CEO at Target, as being a fantastic leader of this business. I think this August is going to be the five-year anniversary of Cornell taking over as CEO. He came in at a tough time for Target. Had a great first year. Again, the stock has bounced around to different places. But I think operationally, Target is definitely in the upper echelon of the traditional bricks-and-mortar retailers, especially when you consider its size, and, to your point, especially when you consider what they've been doing with digital sales.

Malin: Yeah, they have a footprint of 1,800 stores. That's no small feat to manage. Increasingly in this space, you've seen, there's the really good operators -- Target, Walmart, Costco, -- and then you have your worse-off ones, and there's really no middle space. Again, I think you know the stock's reacting positively because even for the best of the best, this was a pretty phenomenal end of the year for them. 

Hill: In terms of kicking off this new fiscal year, they seemed pretty optimistic. The guidance seemed pretty good. It seems like if, you're looking for the stock to move higher in a meaningful way over the next 12 months, they have to follow up this strong holiday quarter with at least a couple more -- maybe not coming in close to 5.5% comps, but they really can't do much worse than that. 

Malin: Yeah. I think it's all relative, too, to overall market performance. We've been talking for -- it feels like forever -- maybe two years -- about how the markets seem highly valued and pretty frothy. You've seen the tech space heat up, and recently it's cooled off a little bit, so that's a little less volatility. But I think in the event that we do start to see less growth orientation in the market, Target could be actually well-positioned from an overall portfolio management strategy. 

Hill: Let's move on to earnings from Salesforce.com. Shares of Salesforce down a little bit. I'm assuming that's because of the guidance for Q1, because it looked like the fourth-quarter results were rock-solid.

Malin: Fourth-quarter results were really good. Q4 revenues were about $3.6 billion, that was up 27% in constant currency. Full-year revenue was $13.2 billion. That was up 26% year over year. They had a lot of growth in their $20 million-plus customer relationships, up 48%. A lot of positive inertia behind them. 

I think the challenge the market is having with this quarter is not necessarily the immediate guidance, but more long-term. Management raised their goal for 2023 revenues of $26 billion to $28 billion. That's implying about a 21% growth year over year at the high end. I feel like analysts were just maybe a little bit more skeptical of Salesforce's ability to do that. Management was questioned about it, and I didn't feel like their answers were necessarily addressing the exact questions that they were given.

Hill: I didn't listen to the call. Marc Benioff has done a great job leading this company. Certainly, if you're a shareholder of Salesforce -- 

Malin: You're happy.

Hill: You're happy. Even with the drop today, the stock's up nearly 30% over the last year. It's close to a double over the last two years. What was Benioff doing on this call? He has a track record, and between the average Wall Street analyst and Marc Benioff, given his track record, I'm going to side with Benioff. Unless he was just being completely obstinate on the call. [laughs] 

Malin: No, he wasn't at all. I just think maybe he was being a bit opportunistic, maybe a little bit too confident. I mean, 21% growth year over year isn't outrageous for what they have done. They mentioned a lot that CRM, which is their specific space in the enterprise software market, is the fastest-growing of all software markets. This is really driven by the movement to cloud, the drastic digital transformation, and also their customer base. But, you've increasingly seen IT companies spend more on innovation rather than maintenance, which is where the primary spend was in the past. So, while those should be tailwinds for Salesforce, I think you're going to see a lot more competition in the space. Salesforce is doing everything correctly, I would say, but I think analysts are just more expectant of higher competition and more competition. 

Hill: Who are some of the other competitors in this space? We throw the word "cloud" around a lot. There are so many businesses involved in one aspect or another. Who is Salesforce going up against? And, therefore, who's going to be the happiest if Salesforce just disappeared from the Earth?

Malin: That's a very wide net we're casting here. Salesforce is that classic software product suite. They do so many things that can solve so many issues for so many different customers that it's not necessarily that anyone has one product that is "Salesforce or X," but sometimes it's a variety of niche players that maybe do one aspect of something better than another. That's an advantage for them, obviously, because it's easier as a customer to have one relationship rather than multiple. But I don't think it's necessarily as stable or defensible as they are maybe presenting it to be.

Hill: Last thing on Salesforce before we move on. I mentioned the performance of the stock over the last couple of years. When you look at this on a valuation basis, is part of the skepticism from the analysts, "Hey, look, you've had a great run. You're not flying with the cheapest stock in the world."

Malin: I always expect that to be a consideration. We've seen the return of a little bit of volatility, especially in the tech space. I think it's been a long time coming. We're in a 10-year bull market now. It feels like there should be some coming back down to Earth, a realistic grounding, and I do think this is a really expensive stock. It always has been. So, again, not unjustified. I think they've done a phenomenal job. I just don't know how that's going to be looked at in the next five years. 

Hill: By the way, for all of the headlines back in December, which was just three months ago, think about, people were running around with their hair on fire. You had some investors out there who just said, "Look, I've had a good run. I'm out." And, well, from the December 24th lows, the S&P 500 is up about 15% since then. That's why we try not to be traders. 

I wanted to talk to you about the food delivery space because you're the first person at this company I ever remember hearing talking in a meaningful way about Grubhub (GRUB) as a stock and saying, "No, really, this is one worth paying attention to." And Grubhub the stock has had kind of a rough 12 months, but in general, this is a well-run business, and if you're a long-term shareholder, you've been rewarded because of that. Where do you think this space is right now? Obviously, with Grubhub competing against the likes of DoorDash, which is private for now, Postmates, which announced they're going public, and any number of regional players --

Malin: Uber.

Hill: Uber, with Uber Eats, that sort of thing. This seems like maybe not a mature market, but a maturing market. What do you see when you look at this landscape? 

Malin: I think it's a really interesting space. For a little bit of context, Grubhub is about a $7.2 billion market cap. As you mentioned, in February, Postmates has filed initial paperwork for an IPO. They're valued at about $1.85 billion. Still smaller, but again, still a unicorn, up with those other ones that are waiting for public offerings. Then, you have DoorDash, which announced another round of funding at the end of February. They're put at about a $7.1 billion valuation, almost equivalent with Grubhub. Then you have Uber Eats, which is obviously factored into Uber's overall valuation. 

It's definitely a spot where investors are seeing opportunity. I think it's an interesting spot, again, because Grubhub is really the only pure play that is public, where you have the most information. I still would say it's pretty early on in these stages. When Grubhub first came public, I don't think people saw this as an opportunistic space. I think we're now turning the corner on that, and we're not sure who this winner is going to be, or if it's one winner or all of these are winners. But finally feels like people are recognizing this space.

Hill: What caught my attention the other day was a TV commercial for DoorDash. For the longest time, people of my age and older just thought in terms of, "If I'm going to get something delivered to my house, I have to call the restaurant if I'm looking for anything other than pizza." Now, you have Grubhub, Uber Eats, DoorDash, all these others come along, and they say, essentially, "Whatever restaurant you want, we're going to get it for you." The DoorDash commercial, I thought, did a great job of getting that across. It was showing in the commercial a variety of different people in different situations, different life situations. A young couple with a newborn baby, people throwing a party, all this stuff. All these different situations and all these different cuisines, and it was essentially, "Yeah, DoorDash is going to get you there." And for whatever reason, for me, who has not used any of these services, it was a little bit of a light bulb moment. I was just like, "Oh, that's how this works! I just get the DoorDash app on my phone, and presumably, I don't have to worry about what I'm in the mood for."

Towards that end, and you just touched on this, I'm not saying this seems like a zero-sum game, but it really does strike me as an industry right now that's only going to have a couple of winners. It's hard for me to imagine, if they do it, right, that Grubhub or DoorDash -- or Uber Eats for that matter; I'm sorry, Postmates, but the name alone just isn't getting me interested, so I'm just going to push them off. But it's hard for me to imagine that if they execute on the right level, that they don't become one of two or three winners. 

Malin: Everyone is trying to carve out their niche. Recently, you've seen Grubhub push out with a lot of chain national brands. Postmates, I know you dismiss them --

Hill: I'm dismissing the name, that's all. DoorDash, I get it, right from the name. Postmates, I immediately go to post-it notes. 

Malin: Postmates is a little bit of a different operating strategy. They deliver random items. They have a partnership with Apple and Walgreens as well as restaurant food. They do unlimited delivery subscriptions for deliveries of $15 or more for a flat fee of $9.99 per month. In that sense, I would think Postmates is more of an Amazon competitor, which is not a space I'd be as interested in.

Hill: [laughs] The fact that they're saying, "We're going to start a business, and we think we'd like to replace Amazon in terms of delivery."

Malin: Yeah, that's challenging. I mean, a flat fee for delivery is kind of interesting, but I don't know about the logistics of doing all of the other tech and medicine and things like that. DoorDash, they've also started delivering groceries. They partnered with Walmart last year. 

Logistics is a hard business. There's never going to be a huge amount of profit, it's going to constantly be a game of small margins. Originally, when I started looking at this space, I thought, at least on a geographic basis, there's going to be one dominant player, so it's going to be a winner-take-all, at least by geography. Maybe my thinking has shifted a little bit. If you look at other logistics industries -- ridesharing, you have Uber, Lyft, traditional Yellow Cab, and a lot of regional or geographically focused players. Housing, so, you have Airbnb vs. Marriott vs. Hyatt, etc. Package and parcel delivery, you have the U.S. government, in addition to Amazon's own logistics, in addition to UPS and FedEx and all these other players. Maybe there is room for more than one, is my new thinking. But I haven't decided where that caps out. On some level, it can't just be price, right? We have to have some other differentiator that makes one more or less appealing.

Hill: Right. To that point, it all comes down to the execution. You can love Grubhub until they start doing a bad job of delivering, then you have other options. Who do you use?

Malin: I use Grubhub. Grubhub owns Seamless and I first started ordering delivery when I was using Seamless in New York.

Hill: Definitely an interesting space that we're going to keep watching. Curious to see how these IPOs go.

Real quick, before we wrap up, as I mentioned, Fat Tuesday. 

Malin: Today, everywhere in the world, it's just Tuesday. But in New Orleans, it's Mardi Gras. 

Hill: [laughs] So, what's a typical Fat Tuesday like for the average college student in New Orleans? What does the day look like? I don't need all of the gory details, but just some of the, we wake up, it's Fat Tuesday. What are we doing? 

Malin: You're still awake. You don't wake up.

Hill: [laughs] You're still awake from Monday night, OK.

Malin: Yeah. Then, there's two really large parades on Monday morning. It starts with Rex. Each parade has a Krewe. The Krewes are all historic and they have a traditional aspect to all of them. Rex is actually the oldest and one of the most prestigious parades. They run Tuesday morning. Then, right after Rex, it's Zulu. Those both roll, and they should be finishing up soon-ish. Then you go to sleep.

Hill: Then you go to sleep?

Malin: Yeah. Tuesday afternoon, you just sleep.

Hill: Presumably so you can wake up Tuesday night? 

Malin: No. Mardi Gras pretty much over at the end of Tuesday.

Hill: Oh, it's over?

Malin: Yeah.

Hill: Oh, here I thought, live it up big before Wednesday. No?

Malin: No. Carnival season starts, like, middle of January. The Mardi Gras celebration starts Thursday night-ish with Muses, which is another parade. They throw shoes and it's a big deal to catch a shoe. 

Hill: You'd better catch a shoe if someone's throwing it at you. It's not like beads, where if you don't catch the beads, you won't get harmed. I mean, depending on the shoe, you can get whacked. 

Malin: Yeah, but everyone's jumping for it. You have to strategize.

Hill: In four years of going to college in New Orleans, did you ever once catch a shoe? 

Malin: I didn't catch a shoe. I have caught a coconut, which is the big throw for Zulu. I've made some wins.

Hill: Given your height, that's impressive!

Malin: I think they thought I was a child. They were much nicer, they just drop them off for you.

Hill: Abi Malin, thanks for being here!

Malin: Thanks for having me!

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery! The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!

[ Go to the Mardi Gras -- Professor Longhair ]

Check out the latest earnings call transcripts for Target and Salesforce.com.