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Target Has a Christmas Surprise for Investors

By Demitri Kalogeropoulos - Updated Jan 15, 2021 at 12:59PM

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The retailer's growth momentum held up through December.

It's full-speed ahead for Target's (TGT -24.93%) business. On Wednesday, the retailer issued a sales update that covered the key holiday shopping season, which tends to shape its broader fiscal year.

The announcement didn't include earnings or profitability metrics, but there was still plenty in the report to have investors feeling cheery heading into early 2021. Let's take a look.

Winning market share

Revenue growth was impressive, even through it slowed compared to Target's blockbuster third quarter. Overall, comparable-store sales jumped 17% when you include the over 100% spike in digital orders. Customer traffic was up a solid 4%, and average spending per visit continued to soar, rising 12%.

A young woman sitting on a couch with her computer on her lap, while she holds a credit card in one hand.

Image source: Getty Images.

It will be a few weeks before we get a full picture from peers like Walmart, but Target's growth is likely to keep it near the top of the industry. Costco said in early January that comps rose 11% in the core U.S. market, after all.

Target executives said the chain won market share in each of its main product categories, with especially strong growth in the home-furnishings segment. "The momentum in our business continued in the holiday season," Brian Cornell said in a press release, "with notable market share gains across our entire portfolio."

Likely profit wins

While the update didn't include earnings metrics, it suggests Target enjoyed rising profits over the holidays. Demand was strongest in its consumer discretionary categories, for one, which include consumer electronics and home furnishings. Target also logged a 193% spike in same-day delivery services, which have helped push operating margin higher in recent quarters.

The chain got a lot of leverage from using its stores as fulfillment centers, given that 75% of U.S. shoppers live within 10 miles of at least one Target location.

TGT Operating Margin (TTM) Chart

TGT Operating Margin (TTM) data by YCharts.

Wins in both of these areas allowed operating margin to jump to over 8% of sales in Q3 from 5% a year ago, so it wouldn't be a surprise to see the chain announce a similar increase when it reports full Q4 results in a few weeks.

Looking ahead

That official report should come out in early March, and a lot can change about the selling climate in that time. Yet investors know from this sales update that Target's market-beating growth streak extended through the entire fiscal year in 2020. That means the chain could put more room between itself and rivals like Walmart and Costco this year, especially when it comes to profitability.

Surging cash flow also means higher direct-cash returns to shareholders, mostly through stock buybacks. The chain should also be in a great position to announce a more aggressive annual dividend boost in June, which will mark its 49th consecutive raise. That's great news for income investors and for any shareholder who plans to hold on to this attractive growth stock for the long term.

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Stocks Mentioned

Target Corporation Stock Quote
Target Corporation
TGT
$161.61 (-24.93%) $-53.67
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$122.43 (-6.79%) $-8.92
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
COST
$429.40 (-12.45%) $-61.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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