Target (TGT 0.96%) recognizes the challenging retail environment and the choices available to the customer. To gain and retain shoppers, it must provide exceptional service with ever-increasing convenience. Gone are the days where it pays to place the milk in the farthest corner of the store to expose the consumer to more items in the hopes they make impulse purchases. Its stock is up 87.2% to $124.38 near its all-time-high of $126, significantly outpacing the S&P 500 growth of 24.4%

Target is bucking the downward trend in the retail industry, reporting growth in sales, profit, and foot traffic. In its Q3 earnings results, it reported comparable-store sales growth of 4.5%, earnings-per-share growth of 18.2%, and a traffic increase of 3.1%. The 4.5% growth in sales this quarter shows consistent and steady progress, compared to 5.1% growth last year. It is one of the few retailers, along with Walmart (WMT -0.80%), battling successfully with the Amazon effect and the retail apocalypse. 

Target employees in a ribbon cutting ceremony.

Image Source: Target

The initiatives are working

Target is the first retailer offering same-day drive-up service in every state across the U.S., and it's available at all its 1,750 stores. Drive-up is its highest-rated service, with 500% growth in the quarter. Having an online order brought to a car offers convenience. An internet order can be in the possession of a customer in a Target parking lot usually within an hour.

In-store order pickup is not a new initiative; it was started five years ago and is gaining popularity. This year, with fewer shopping days between Black Friday and Christmas, the option to order online and pick up within an hour will drive sales from buyers pressed for time. Customers picking up items in-store offers higher margins because it leverages existing store assets.

Shipt is a same-day delivery company that Target acquired in Dec. 2017 for $550 million. It offers the option to have orders delivered to homes on the same day for $9.99 per order. The acquisition increased the choices available in order fulfillment and is available on over 65,000 items from Target's site. It's proving to be fruitful as sales volume fulfilled by Shipt saw 100% growth in its most recent quarter.

Target Circle is a new loyalty program launched nationwide in October. The program has gained mass acceleration and reached 35 million members as of Nov. 20. According to research during a test period, guests enrolled in the program spend 2% to 5% more than those who are not registered. Management expects the program to be a significant driver of the forecasted 3% to 4% growth in Q4 comp sales.

Black Friday sales set new records on, where it had its biggest day ever and double-digit growth. Management expects the positive results to carry through the weekend and into next week as guests are responding to promotions such as 15% off nearly everything online and in-store.

Getting people to visit and continue visiting stores

Target has implemented a couple of strategic decisions to get people to its stores by increasing the availability of items bought frequently, and remodeling stores at an accelerated pace. It's improving its inventory management system, which informs the company on which items are selling through so it can have plenty of those items on its shelves. Management said in the Q3 conference call, "sales of beauty and cosmetics saw amazing growth in the high single digits." Categories such as food, beverage, beauty, and essentials drive everyday traffic to its stores.

Target's $7 billion investment initiative in 2017 called for remodeling 1,000 stores and opening 30 small format stores each year. Fast forward to today, and it's on pace to reach its 1,000 remodels goal by the end of 2020 and has opened more than 100 small-format stores. Shoppers have been responding well to the redesigned stores, as evidenced by the comparable store sales and traffic growth. Management expects the increased spending and traffic to sustain beyond the first year after a remodel. With the completion of the investment initiative coming at the end of 2020, its cash flow will see an increase from 2021 through the next few years.

What does this mean for investors?

Target is doing an excellent job adapting to the changing landscape of retail. It's providing the consumer with a compelling reason to visit its stores and to return frequently. The future is still a challenging environment for large retailers, but what will always prove valuable is a management team capable of meeting those challenges effectively.

Target is trading at a P/E of 20 and a PEG ratio of 2.15. Comparatively, Walmart is selling for a P/E of 23.82 and a PEG of 5.81. Although Target is trading at a discount to Walmart, they are both expensive. To start a position or to build on an existing position in Target, wait for the inescapable pullback in price.