Target (TGT -0.70%) shares recently crossed back into positive territory for the year after falling by 30% during the market's slump in March. That rebound rally reflects surging investor optimism that the retailer can thrive through the COVID-19 pandemic as more shopping demand moves online.
Target provided some evidence of that success in its first-quarter report in May, but expectations are even higher for its second-quarter announcement, set for Wednesday, Aug. 19. Let's see why investors are so optimistic heading into these results.
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Growth rates
Target's first-quarter sales improved by 11%, or more than triple its expansion rate from fiscal 2019. The retailer benefited from some unusually favorable selling conditions, including the temporary closing of many rival stores during COVID-19 containment efforts and rising incomes from economic stimulus measures. Target's push toward multi-channel retailing paid huge dividends, with customers embracing quick, convenient fulfillment options like ship-from-store or in-store pickup.
This week's report spans the selling months of May, June, and July, which means it will include additional pandemic-influenced gains along with a return to more normal growth as state economies reopened. Investors will be most interested in seeing how digital demand has changed after growth accelerated from 33% in February to 282% in April. Walmart announces its Q2 metrics a day earlier, and comparing the two reports should show whether both retailing giants continue to gain market share thanks to their robust multi-channel selling platforms.
Handling those costs
Target's earnings performance was disappointing to many investors last quarter. The chain took writedown charges related to apparel products that had missed their demand window during the early days of the pandemic, for example, and saw surging costs related to the shift toward digital spending. Operating income fell despite the rising sales base, with profitability landing at 2.4% of sales compared to 6.4% a year ago.
WMT Operating Margin (TTM) data by YCharts
CEO Brian Cornell said in mid-May that this slump reflected unprecedented volatility in demand, which likely settled down in Q2. The boost is a long-term positive for the business, though, since Target's quick-fulfillment sales channels are its most profitable. As a result, investors will be looking for evidence that operating margin is climbing back up in preparation for a strong finish to the year ahead.
Looking to the holidays
Target will likely have positive factors to consider as it looks out to the holiday season. It has widened its customer base significantly over the last six months, and most of those shoppers have given the service high marks for convenience and value. Those wins give it a good shot at maintaining a faster sales growth rate than in years past, even if comps slow from Q1's double-digit rate.
On the other hand, unemployment is high and the economy just endured its biggest shock on record. We'll find out this week whether Target believes its operating assets will help it navigate through what could be a difficult period ahead for the industry through late 2020 and beyond. It's likely, for example, that many retailers will be trimming their selling bases next year. Target might head the other direction, if shoppers continue to flock toward its flexible omni-channel selling platform.
