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Target's First Quarter Shows Why It's Primed for Long-Term Growth

By Jeremy Bowman – May 22, 2020 at 9:16AM

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Though profits fell in the recent quarter, the retailer is executing on its key strategic initiatives.

As expected, Target's (TGT -2.24%) earnings fell sharply in its first quarter as the company ramped up bonuses for front-line workers and shelled out for additional supply chain expenses.

The stock is down modestly since the release, but despite the decline in profits, this was an all-around strong quarter. Let's review some of the highlights below. 

  • Comparable sales jumped 10.8%, driven by the digital channel, which accounted for 9.9 percentage points of comparable sales growth. 
  • Digital sales surged 141% in the quarter, accelerating through each month. During April, Target fulfilled more orders on an average day than it did on Cyber Monday last year. 
  • Sales from same-day fulfillment services, including Drive Up, Order Pick Up, and Shipt, jumped 278% in the quarter.
  • Adjusted earnings per share fell year over year from $1.53 to $0.59.

Overall, the results portray a burgeoning digital and omnichannel business that is fulfilling its promise to investors and fueling Target's long-term growth in a challenging environment.

A toy section at a Target store

Image source: Target.

E-commerce is booming

Target's first-quarter e-commerce results were of course helped by the shutdowns across the U.S. as sales shifted to the online channel across the retail industry. That trend is likely to continue as fears around COVID-19 will keep people away from stores for the foreseeable future, even when they start to reopen. Despite the strong sales growth in the quarter, Target still saw in-store traffic decline.

The company has made tremendous strides in e-commerce in recent years, acquiring Shipt to accelerate same-day delivery and rapidly rolling out in-store and curbside pickup, which have delivered strong growth during recent holiday seasons as well.

Target was once a laggard in e-commerce retail, as the company made the mistake early on of outsourcing its website to Amazon for the first decade of the 2000s and had to spend years playing catch-up. It's now clear those efforts have paid off. Digital sales contributed 15.3% of revenue in the quarter, more than doubling from the prior-year period and outpacing the share of e-commerce sales in the retail industry overall.

According to an eMarketer forecast, Target was expected to jump from #11 to #8 in U.S. e-commerce sales, but the strong first-quarter growth and momentum for the rest of the year could push up it even higher in the rankings. 

E-commerce is the biggest growth opportunity for retailers, and the company's share of overall retail sales will only get bigger as technology improves and stores adapt to fulfilling online sales. Target was also able to attract millions of new online customers during the quarter as 40% of those who used Drive Up were new to the service, giving the company an opportunity to convert those shoppers into repeat customers.

On the brick-and-mortar side, Target has invested in store remodels and opening small-format locations in under-served parts of cities and in college towns. Though it's pumped the brakes on new stores due to the disruption from the pandemic, that strategy should help further the company's e-commerce growth by making in-store pickup and same-day delivery easier in those areas. Stores fulfilled 80% of Target's digital sales in the first quarter, showing how crucial its store footprint is to its online strategy.

Market share gains

One possibly overlooked line in the company's earnings report is that the company saw healthy market share gains in all five of its merchandise categories, which are food and beverage, beauty and household essentials, apparel and accessories, home furnishings and decor, and hardlines, which include products like electronics, toys, and sporting goods. In most of those categories, Target is competing against non-essential retailers that were forced to close stores, giving Target an undeniable advantage. In apparel, the bloodbath has already started with J.C. PenneyStage Stores, J. Crew, and Neiman Marcus filing for bankruptcy, potentially putting billions of dollars in sales of apparel and other categories up for grabs. In all of Target's operating categories, including groceries, its e-commerce operations are better than the majority of its competitors.

That omnichannel strength, along with the company's unique product portfolio, should give it a competitive advantage during the crisis, and its capabilities in e-commerce as well as its expanding collection of small-format stores in high-traffic areas will drive its long-term growth. 

There's no question that the COVID-19 pandemic  is presenting a slew of challenges to the retail industry. There won't be many winners in this sector from the crisis. Target, however, looks set to be one of them.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman owns shares of Amazon and Target. The Motley Fool owns shares of and recommends Amazon and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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