Thanks to a mid-quarter update, investors already knew that Target (TGT +0.86%) would report blockbuster sales to close out its fiscal 2020. The retailer didn't disappoint, reporting on March 2 that revenue spiked over 20% year over year thanks to booming customer traffic and higher spending per visit.
The chain posted sharply higher profits too as spending tilted toward higher-margin merchandise in the home goods and furnishings segments. And while management declined to issue a detailed outlook for the year ahead, Target entered fiscal 2021 with its strongest momentum in recent memory.
Let's take a closer look.
Image source: Getty Images.
Sales updates
The demand surge didn't let up through the holiday shopping season. In fact, comparable-sales gains hit 20.5%, even better than the 17.2% increase the company revealed in its holiday update.
That boost came from a 118% jump in e-commerce comps, but Target also enjoyed 6.5% traffic growth at its stores. Walmart, in contrast, posted declining traffic as its comparable-sales growth dipped to 8.6% in the latest quarter.
Executives celebrated the market share wins by casting them in a broader perspective. Target gained roughly $9 billion in new share for the year, management estimated. And its $15 billion sales increase in 2020 was more than the growth it had achieved in the previous 11 years combined. "We saw record growth," CEO Brian Cornell said in a press release, "as our guests turned to Target to safely provide for their families throughout the pandemic."
Paying full price
Target had no trouble passing along full prices to shoppers, either. There was an "unusually low" rate of markdowns in the fiscal fourth quarter, management said, which helped push operating margin up to 6.5% of sales compared to 5.1% a year ago. The profitability increase would have been bigger too if the company hadn't spent as aggressively on its supply chain and digital fulfillment platform.
For the full year, operating income jumped 40% to $6.5 billion to double the expansion rate Target achieved on its top line.
Cash flow surged as well, giving management confidence to restart its share repurchases in recent weeks after pausing that activity through almost all of 2020. Target might ramp up those buybacks even as it pays out a rising dividend this year.
Looking out to 2021
Target said the consumer demand outlook was too uncertain to support the fiscal year prediction that would normally arrive with its holiday-quarter report. The year is likely to see wild sales swings following the disruptions that started impacting the company last March. Target might also need to go through a period of elevated spending in areas like e-commerce and fulfillment to solidify its recent market share gains.
Those factors might make for weaker sales and earnings results in fiscal 2021. However, Target has a good shot at protecting its larger sales footprint given how engaged its shoppers have been with the chain. This past year showed that Target can grow quickly without sacrificing margins by delivering a convenient, multichannel shopping experience to customers. Its challenge in the next year or so is to keep those new fans happy even as their spending priorities change.
