Target (TGT 0.75%) shares surged Wednesday, gaining by double digits after the big-box retailer reported blockbuster results in its third-quarter earnings report.

Comparable sales jumped 24.3%, a new company record, driven by strong performance in both in-store sales and the digital channel. Revenue increased 24.7% to $23 billion, easily beating estimates of $20.1 billion, while Target leveraged that sales growth on the bottom line with adjusted earnings per share climbing 85.7% to $3.38, making the analysts who predicted just $1.62 in EPS look silly. Digital sales also surged by 195%, showing that the company's investments in same-day fulfillment capabilities continue to pay off.

In the parade of stellar metrics, however, one figure in particular stood out. Management said the company gained $5 billion in market share through the first half of the year. That means that of the $6.5 billion in incremental sales Target has added through the first half of the year, most of it came at the expense of weaker rivals. And that has significant implications for the company's long-term growth potential.

The toy section at a Target store

Image source: Target.

Not going back

One common refrain among CEOs during the pandemic is that we're "not going back" to pre-pandemic ways of doing business. Business leaders believe many of the changes that Americans have made to adjust to life during the crisis, including shopping online or working remotely, will remain in place, at least to some extent, after the pandemic ends. In other words, the pre-pandemic norms have forever changed.

This has become abundantly clear in the retail sector. Dozens of retailers, many of which are rivals of Target, have already filed for bankruptcy, including apparel retailers like J.C. Penney, Neiman Marcus, and J. Crew; Ascena Retail Group, the parent of Ann Taylor and Lane Bryant; and Tailored Brands, the owner of Men's Wearhouse and Jos A. Bank. In home goods, Tuesday Morning and Pier 1 have thrown in the towel, and a number of others like department stores, mall-based chains, and even traditionally strong retailers like off-price king The TJX Companies -- parent of T.J. Maxx, Marshalls, and Home Goods -- are struggling, donating market share to Target.

That trend is likely to continue for the duration of the pandemic: Online shopping will remain popular, favoring Target. And consumers will consolidate shopping trips for safety reasons, also favoring diversified retailers like Target, which allow shoppers to pick up a wide range of goods in one visit.

There was plenty of evidence of this in Target's earnings report. Sales at clothing stores plunged 36% in the first seven months of 2020, compared to the prior-year period, according to the Census Bureau. But Target's apparel sales went from a 20% decline in the first quarter to double-digit growth in the second quarter -- taking clothing sales that might have gone to Gap, Kohl's, or TJ Maxx, because shoppers are already in Target's stores picking up something else they need. Walmart saw a similar effect.

Similarly, Target's ability to offer an array of shopping options, including same-day fulfillment options like Drive Up or Order Pickup, gives it an advantage over other retailers without those capabilities.

Leveraging its strengths

Target is unique among American retailers, and arguably no company appeals to a broader cross-section of the country. Like Walmart and Costco, Target sells a wide range of products, including food, apparel, home goods, health and beauty items, and "hardlines" (including electronics and toys).. But unlike Walmart and Costco, which derive about half of their sales from groceries, Target's business is much more evenly divided across those five categories. That gives it more exposure to discretionary goods in areas like home and electronics that surged after the lockdown ended, and a greater opportunity to grab market share from flailing non-essential retailers. Target's status as an essential retailer with strength in non-essential items like apparel and home goods gives it a decided advantage, and one that should continue beyond the pandemic.

Target has stores spread across the country, in all 50 states and in both urban and rural areas, giving it exposure to a broad range of customers. The company is also continuing to open small-format locations in high-density areas that support its same-day fulfillment services, showing its confidence in that strategy at a time when shopping patterns are being flipped upside-down. Additionally, Target's "cheap chic" reputation helps it appeal to a wide range of income brackets, again making it a good candidate for gaining market share from its struggling peers.

Management said that in August, quarter-to-date comparable-sales growth slowed to low double digits, as the back-to-school season is being delayed and there may be some impact as certain federal unemployment benefits end. But that growth is still at an incredibly strong clip, especially during a recessionary environment in which some customers avoid visiting stores in person for health reasons.

While Target's growth is likely to moderate as it rolls off of the reopening bounce, the company has clear advantages over many of its retail peers. Over the coming years, it's set up to take billions in market share from its rivals.