There are many reasons to love Target (TGT 0.25%). Plenty of investors agree, and the stock has almost tripled over the past three years. But there's one reason that stands out and gives me confidence in the company's prospects. Target has a pretty strong advantage over similar companies, which makes it worth buying.
Planning for the future
COVID-19 has been rough for businesses and individuals. But Target made life a little easier for customers during the pandemic and gained market share in the process. Other companies that sell essentials, like Walmart (WMT 0.42%), also performed well, but not as well as Target.
Image source: Target.
The secret to Target's success began way before the word "pandemic" became part of our daily lexicon. Target invested in its omnichannel capabilities anticipating the digital revolution, and that's giving it an edge now that lockdowns and social distancing are the current norms. CEO Brian Cornell said, "Our strong results in 2020 reflect the benefits of our multi-year effort to build a durable and flexible model, with a differentiated assortment and a suite of industry-leading fulfillment options."
More importantly, it's also a gateway to the company's future success.
Delivering when people need it
Target's sales have surged throughout the pandemic. Digital options, led by same-day services, were key drivers, but in-store sales were also high.
| Metric | Q1 2020 | Q2 2020 | Q3 2020 |
|---|---|---|---|
| Comps growth | 11% | 24% | 21% |
| Digital growth | 141% | 195% | 155% |
| Same-day services growth | 278% | 273% | 217% |
| In-store growth | 1% | 11% | 10% |
Data source: Target quarterly reports. Growth measured year over year.
While holiday sales results won't be released for a few weeks, the company already reported a record-breaking Cyber Monday.
Drive-up itself grew 500% in the third quarter. Digital, especially same-day services, is clearly resonating with customers.
What are same-day services all about?
Target acquired Shipt same-day delivery services in 2017 for $550 million, and it has been a key part of its success.
The mega-retailer offers more than 65,000 products through Shipt, recently adding apparel on top of grocery items, baby, beauty products, and more. It's planning to add more products as well. Target makes it super easy to buy, with a "Deliver same day" button if the service is available in a customer's zip code.
What's more, Target has figured out a way to make same-day delivery profitable, using local stores for order fulfillment instead of distribution centers. Eighty percent of sales were fulfilled in-store in the 2020 first quarter, and that increased to 95% in the third quarter. Orders get to customers faster and it cuts down on shipping costs, contributing to third-quarter adjusted earnings per share increasing over 100% to $2.79.
Where is this going?
The shift to digital shopping was accelerated by COVID-19, but the newest shopping trends are a mix of digital and physical, and that's where Target shines.
Customer feedback indicated more contactless shopping options, and Target is introducing improved features such as self-checkout lanes and drive-up without scanners, as well as various mobile wallets. According to the Wall Street Journal, Amazon tried to sell Target its cashierless technology, but so far it hasn't announced any agreement.
And there's more than one reason to be confident in the company's future, rounding out a solid trajectory for growth. It has created a large range of owned brands with discounted pricing that are popular with customers. It has also developed a small-store format that works well in specific areas, giving it cost-effective leverage when locating areas for new store launches. Out of 30 stores opened in 2020, 29 were small stores. And its store count of close to 1,900 still pales in comparison to Walmart's more than 5,000.
Target stock is up 35% year to date as of this writing, and I think investors should consider buying shares now to benefit from further growth.
