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3 Takeaways From Target's Holiday Recap

By Adam Levy - Jan 15, 2021 at 9:45AM

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Here's what investors can expect in 2021.

Target (TGT 2.46%) had a lot to celebrate this holiday season. The big-box retailer reported comparable-store earnings growth of 17.2% year over year, a stellar improvement from last year's disappointing results during the same period.

Digging into the details of Target's update can provide investors with a better idea of what to expect from the company in 2021. Here are three big areas to watch.

A Target storefront.

Image source: Target.

Store-fulfilled orders

Ninety-five percent of Target's sales came from its stores. That includes shoppers going into stores, online orders made for pickup in store or via its DriveUp service, and its Shipt same-day delivery service. It also includes digital orders Target ships from the back of its stores to customers' doorsteps.

That number is even more impressive when put in the context of a 102% increase in digital sales. Target's success with fulfilling orders from its stores even with surging demand bodes well for its ability to invest capital efficiently.

Target's most recent effort to improve the efficiency of its stores is to add dedicated sortation centers in areas of high-density shipping. Instead of sorting everything in a store's backroom, stores will just package everything up and send it to a sortation center. That will allow stores to dedicate more space to inventory and improve throughput.

Target's also remodeling stores with digital fulfillment in mind.

Investors should expect Target to continue investing in ways to make its network of stores more efficient in fulfilling digital orders through DriveUp, Shipt, and ship-from-store. Doing so will give it an advantage in fulfillment speed and shipping costs that will be hard to beat.

Apparel's bouncing back

One of the hardest-hit categories for Target amid the coronavirus pandemic last year was its apparel sales. In November and December, apparel started to come back. Comparable sales increased in the high-single-digit range, faster than the 5% growth it saw last year.

The improvements in apparel sales bode well for Target's 2021 results. It's likely sales in other categories that got a boost during the pandemic will fall back to Earth. Faster growth for apparel could help offset declines in other areas.

Target will see an easy comparable quarter for apparel in the first quarter, after significant inventory markdowns in 2020. Based on Target's holiday results, investors should expect a strong uptick in comparable sales well into the double digits for the category in the first half of the year, and it could sustain that momentum as it heads into the tougher back half of the year. 

Online grocery shopping could be huge

Target was late to the online grocery game. It didn't make fresh and frozen food available to customers through its DriveUp program until last summer. But it expanded quickly. Management said it offered the service in over 1,600 locations by mid-November on its third-quarter earnings call.

Target saw 5.1 million grocery orders through DriveUp in November and December. That's just a small fraction of the average monthly online grocery orders shoppers make. Americans made 62.7 million online grocery orders in November, according to data from Brick Meets Click. That suggests Target took less than 5% of the market.

Not only is there a lot of room for Target to expand its market share, the overall online grocery market will continue to grow in 2021 and beyond. Online grocery sales will grow from $106 billion in 2020 to $250 billion in 2025, according to estimates from Mercatus.

Target has the advantage of offering more general merchandise for DriveUp orders than its competitors, which could make it a convenient one-stop curbside pickup destination. Ultimately, that should lead to a larger share of online grocery.

Increasing penetration of the online grocery market could prove important in maintaining food and beverage sales growth as consumers are (hopefully) able to return to normal restaurant dining in the back half of the year. Combined with improving apparel sales at the retailer and better margins on digital fulfillment and store efficiency, 2021 is looking bright for Target.

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