Investors initially panned the fourth-quarter earnings report from Target (TGT +1.75%). Even though the retailer announced some market-trouncing growth and profit figures over the holidays, Wall Street focused instead on the potential for slower gains ahead.
In a conference call with analysts, CEO Brian Cornell and his team detailed that 2021 outlook while explaining why Target believes it can defend the $9 billion in extra market share it gained during the past year.
Let's look at some highlights from that presentation.
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Reaping the long-term rewards
"Without these investments, we simply wouldn't have been able to satisfy the exploding guest demand for same-day services, represented by more than 600% growth in drive-up," Cornell said.
Target grew sales at a record pace in 2020 that widened the market share gap with peers like Walmart (WMT 1.06%). Most of the credit goes to the billions of dollars that the retailer directed in prior years toward turning its stores into delivery and fulfillment hubs, executives said.
That fact helps explain why rivals like Walmart and Home Depot recently announced massive capital projects aimed at the same goal. "At the heart of the platform was a belief that consumers would continue to flock to our stores for multi-category, one-stop shopping," Cornell said. In fact, Target managed 4% higher customer traffic for the year while Walmart's declined. Digital sales more than doubled at the same time.
Where Target stands out
Chief Growth Officer Christina Hennington said: "Our multi-category assortment is a competitive advantage because it keeps Target relevant, no matter what. But how we manage that assortment, the premium we place on curation, partnerships, and product design and development, that's what differentiates Target."
Target's exclusive merchandise, including in-store brands and new partnerships with companies like Levi's and Ulta Beauty, combined with its ultra-fast fulfillment to make the retailer a compelling choice for shoppers, whether they were looking for consumer staples or for luxuries like athleisure apparel.
TGT operating margin (TTM) data by YCharts. TTM = trailing 12 months.
These successes also supported higher prices and rising profitability, with operating margin jumping to 6.5% over the holidays from 5.1% a year ago.
Profit pressures ahead
CFO Michael Fiddelke said: "Last year's growth of $15 billion [of sales] was equivalent to the addition of more than 300 new Target stores. If we had actually opened that many new locations, we'd have needed some additional [supply chain] capacity, and that need is the same whether growth is coming from a bigger store footprint or higher productivity in our existing footage."
Like its peers have in recent weeks, Target predicted a period of elevated capital spending ahead as the company builds up its supply chains to support the huge growth it achieved in 2020. Profitability should also take a small step back in 2021 due to the return of a more-normal cadence of clearance markdowns.
The bigger factor is management's decision to pour resources into the stores, including through additional remodels, big upgrades to floor space that showcase brands like Apple and Ulta Beauty, and bolstered capabilities for stores to operate as fulfillment hubs.
Target believes efforts like these laid the foundation for the retailing chain's market share growth during an unusual selling year in 2020. The company is now doubling down on these bets, hoping to achieve even bigger gains down the line.
