Target (TGT 0.86%) was one of the biggest retail winners of 2020. Consumers looking to reduce their COVID-19 exposure flocked to its stores as a convenient one-stop shopping option. Target also aggressively promoted its e-commerce business, including newer fulfillment options like curbside pickup and same-day delivery through the company's Shipt subsidiary.

Not surprisingly, Target's strong sales trends continued during November and December. That should drive another big jump in the retailer's earnings this quarter. However, the sustainability of the company's 2020 market share and profitability gains remains unclear.

Impressive holiday sales

Last Wednesday, Target reported that comparable sales jumped 17.2% for the November-December holiday period. This marked a very modest slowdown compared to the company's 20.7% comp sales growth in the third quarter.

The exterior of a Target store.

Image source: Target.

Digital sales drove the bulk of Target's growth during the holiday period, in line with recent trends. Comparable digital sales jumped 102% year over year, while sales using Target's same-day services (in-store pickup, curbside pickup, and same-day delivery) nearly tripled. Comparable in-store sales increased 4.2%, which is a solid result in light of the pandemic.

Target continued gaining market share in all of its major merchandise categories over the holiday season, according to CEO Brian Cornell. The home category remained the strongest performer, as consumers have redirected spending from travel and restaurants to sprucing up their homes during the pandemic. Comp sales grew more than 20% in that category. Electronics sales surged for similar reasons, powering a 20%-plus comp sales gain for the broader hardlines category.

Sales of food, beverages, beauty products, and other essentials also grew at double-digit rates, helped by the ongoing stay-at-home environment. Finally, apparel sales grew at a high-single-digit rate. This was particularly impressive because sales at U.S. clothing retailers and department stores fell by double digits in November and December, according to U.S. Census Bureau statistics. Target benefited from consumers consolidating trips and from its focus on casual and cozy apparel.

Poised for strong earnings

Target's profitability has surged over the past couple of quarters. Strong sales growth has enabled the company to leverage its fixed costs. Meanwhile, the cheap-chic retail giant has been able to cut back on discounting due to strong demand and supply shortages for many key items. This has more than offset cost pressures from the incremental expense associated with digital orders.

Similar factors will likely drive strong earnings growth for the fourth quarter. On average, analysts expect adjusted earnings per share to jump 45% year over year to $2.45 this quarter.

That said, Target didn't completely abstain from promotional activity over the holiday season. In early December, it offered members of its loyalty program 10% off an entire shopping trip, with some exclusions. It also extended its annual gift card sale to two days instead of one and allowed customers to get a 10% discount on up to $500 of gift cards, compared to a maximum of $300 a year earlier. Of course, discounts are typical during the holiday season. It will be interesting to see how Target's 2020 promotional activity compared to its discounts a year earlier when the company reports its full Q4 financial results in early March.

What happens after the pandemic ends?

Target clearly improved its market position during 2020. However, much of its recent success is already reflected in Target's stock price, which has nearly tripled since the beginning of 2019. The shares currently trade for a little more than 20 times the company's projected earnings for fiscal 2020.

TGT Chart

Target stock performance. Data by YCharts.

Some of Target's 2020 sales gains are likely to stick. Numerous clothing retailers have gone out of business or closed stores over the past year. In the home furnishings market, Pier 1 Imports liquidated last year, and other lower-performing chains have closed stores.

On the other hand, as vaccines roll out to the general public, most of the marketwide increase in sales of food and household essentials will reverse. Consumers may splurge on fancy vacations while reducing their spending on home goods and consumer electronics. The end of the pandemic is also likely to stimulate a rebound in traffic to malls and off-price stores. Target will likely give back some of its recent market share gains in the apparel and home categories.

Target should be a decent performer for long-term investors regardless of where sales and earnings eventually land in the post-pandemic environment. After all, the retailer has a big base of loyal customers, a broad store network, and a growing toolbox of convenient options for receiving digital orders. Still, investors shouldn't get too aggressive about buying the stock at its current valuation unless Target's sales gains and margin improvement achieved during 2020 prove durable.