Investors were optimistic heading into Target's (TGT 1.57%) third-quarter earnings report after its last few announcements showed building sales momentum in a competitive industry. The retailer's aggressive push into multichannel selling, meanwhile, has created attractive sales and profit opportunities as consumers place a premium on fast fulfillment options like same-day delivery.
That quick delivery posture paid off again for Target in the third quarter and set the company up for a strong holiday season ahead.
Let's dive right in.
Winning share with speed
Target's sales growth accelerated to 4.5% from 3.4% last quarter. That result stacks up well against Walmart, which recently announced a 3% sales increase in the core U.S. market. Target's two-year growth rate, which smooths out short-term volatility, is 10% compared to 6% for the retailing giant.
The main standout for Target was again the chain's digital selling channel, especially its same-day delivery and pick-up options. In fact, while those fast fulfillment options accounted for about 75% of growth in the second quarter, they provided 80% of the gains this quarter. Target's wider digital sales channel rose 31% on top of last year's 49% spike. "We're seeing industry-leading strength across multiple metrics," CEO Brian Cornell said in a press release, "from the top line to the bottom line."
Margins are rising
It's clear from the results that Target isn't sacrificing its profitability to win all of this extra business. Gross profit margin jumped to 29.8% of sales from 28.7% a year ago as prices rose and as demand shifted more toward high-margin products and high-margin fulfillment options. Cost cuts amplified that profitability boost so that operating income landed at $1 billion, or 5.4% of sales, compared to $819 million, or 4.6% of sales a year ago.
Those wins support management's claim that there is plenty of value in leveraging Target's network of stores as fulfillment centers for online sales and in-store pickups. The financial gains also produced plenty of excess cash that the company could allocate toward growth initiatives and send back to shareholders. The retailer spent $631 million on direct cash returns, roughly evenly split between dividends and stock buybacks.
Executives like to stress that the retailing business is inherently hard to predict, since consumers could change their behavior on any given day, and because other major variables include price cuts or more generous fulfillment offers by the competition. Those risks all reach their peaks during the holiday shopping season.
Still, Target has seen enough robust demand over the past nine months that management feels confident predicting sales growth of as much as 4% in the fourth quarter, which would power earnings of between $6.25 per share and $6.45 per share. Those results would also likely deliver the chain's first uptick in operating margin in three years.
Investors will have to wait for Target's official holiday season update in mid-January to learn whether those optimistic improvements all played out. But the stock's boost immediately following the third-quarter report shows that shareholders believe that's a reasonable expectation, given Target's latest wins.