Target (TGT -0.54%) did it again.
Shares of the "cheap-chic" retailer jumped after the company turned in another impressive earnings report, reaching a new all-time high and marking the second time in a row that the stock has climbed double digits on an earnings report. Target beat analyst estimates on all fronts, with 4.5% comparable sales growth driving adjusted earnings up 25% year over year to $1.36 per share. Target also lifted its full-year guidance, calling for adjusted EPS of $6.25 to $6.45, up from a prior range of $5.90 to $6.20.
A familiar combination of strategic initiatives helped drive the strong performance. Let's take a look below at three reasons why Target is one of the strongest retailers in the industry today.
Image source: Target.
1. Leaning into e-commerce
Over the past few years, Target has made significant investments in its omnichannel business, meaning the combination of its brick-and-mortar stores and its e-commerce storefront. The company acquired Shipt, allowing it to provide same-day delivery in as little as one hour, and has rapidly expanded services like Drive Up, which allows customers to conveniently pull up to their local Target store and get their order loaded into their car by a store employee. Year-to-date, the company made eight million parking lot deliveries, most of which were done in two minutes or less. And 80% of Target's digital comparable sales growth in the third quarter came from same-day initiatives, including Drive Up, same-day delivery with Shipt, and Order Pickup.
Target is in a unique position in the retail industry as it has stores across the country, in both urban and rural areas and neighborhoods ranging from high to low income. Its range of product categories and price points also make it a rare breed in brick-and-mortar retail. All that means its same-day fulfillment options are especially valuable, since Target can appeal to a wide customer base.
Those same-day fulfillment options are also especially useful during the holiday season when time is critical for shoppers searching for gifts, giving the company strong momentum going into the key fourth quarter.
2. Counting on private brands
In addition to e-commerce, Target has also had a lot of success with private brands, as its in-house lines generally afford higher profit margins than mass-market brands -- and when successful, their exclusivity can serve as a way to bring shoppers back to the store. CFO Michael Fiddelke explained the strategy on the earnings call, saying, "On the owned-brand front, it really starts with providing product that we think the guests will respond to, and so curated owned-brand products that drive repeat purchase and loyalty over time. So we start there, and when that owned-brand product goes well, it translates favorably to the gross margin line."
In the third quarter, the company said that apparel and accessories sales jumped by double digits, a contrast with competitors like Kohl's and Walmart that have struggled in apparel. Management also credited its "distinctive owned brands" for the strong performance.
Apparel isn't the only area where Target is counting on private brands to deliver growth. In September, the company launched Good & Gather, a food and beverage brand that doesn't use artificial ingredients or high-fructose corn syrup. Management said it saw encouraging results from the launch of 650 items, and it expects Good & Gather to become its biggest private brand when it makes the full line of 2,000 items available by the end of next year. Grocery is one area where Target has historically lagged behind its rivals, so the new private brand could help it gain share in an important category that drives high-frequency visits.
3. Filling in the gaps
Perhaps more than any other retailer, Target has succeeded at capitalizing on new opportunities in the market, filling in the gaps as other retailers close stores and go out of business and responding to changing consumer demands. Its omnichannel push is one example, and its success in apparel seems to have come in part from taking share from its struggling rivals.
However, the best example of this strategy may be in toys, as the company has seen significant growth in that category following the Toys R Us bankruptcy last year. Toys helped propel Target's growth over the holidays last year, and this year, it's making another big push in toys, selling 10,000 new and exclusive items. Target has also teamed up with Toys R Us and will be fulfilling the revived toy brand's orders through its website. It's launching 25 Disney shop-in-stores and selling exclusive toys from Star Wars and Frozen.
Finally, Target is stepping up to capture holiday sales, again offering free shipping on hundreds of thousands of items during the holiday season, adding nearly $50 million in payroll, and doubling the number of team members working on fulfillment so orders will be ready as soon as possible at peak traffic times.
With its moves in omnichannel and private brands, and its big push for the holidays, Target should continue to deliver solid growth on both the top and bottom lines, especially as so many of its rivals are struggling. Though the stock has already nearly doubled this year, it could have more room to run, as the company looks poised for another strong performance in the fourth quarter and beyond.
