Its performance during the pandemic helps explain why. Comparable sales jumped 19.3% last year and its revenue grew by $15.3 billion, more than its combined sales growth over the last 11 years. Target's bottom line surged as well, with adjusted earnings per share up 47% to $9.42.
The retailer has excelled during the pandemic because of its multi-category format, offering everything from groceries to apparel to home goods, and because of investments the company has made in recent years in same-day fulfillment services. This includes curbside pickup, which it calls Drive Up and saw sales jump more than 600% in last year.
After a blockbuster run, what's next for Target? The company laid out much of its strategy going forward in its financial community meeting following its earnings call on March 2. Investors were actually disappointed when management said that it would spend $4 billion a year on capital expenditures to invest in the business, and sold the stock on that news, though that move looked misguided.
Let's take a closer look at what to expect from Target over the next five years.
Stepping on the gas pedal
On the earnings call, CEO Brian Cornell noted that the company took a contrarian approach ahead of its last investment cycle in 2017. Instead of building out more e-commerce fulfillment centers as was the conventional wisdom at the time, Target decided to put its stores at the center of its omnichannel strategy, leveraging them for same-day pickup. It also acquired Shipt for same-day delivery capabilities.
That strategy has underpinned much of the company's growth over the last few years, and helped it deliver an operating margin of 7.1% last year, ahead of rivals like Amazon, Walmart, and Costco.
With the $4 billion the company plans to invest annually now, it will lean into its omnichannel strategy, remodeling stores, adding new locations, and beefing up its supply chain to handle increased capacity.
Target will accelerate its small-format store openings to 30 to 40 new stores a year, up from a record 29 last year. Recent openings included a store on the Las Vegas Strip and its first location on a college campus at UC-San Diego. The small-format concept allows the company to penetrate densely populated, underserved areas in cities and college towns, and the format pairs with its omnichannel strategy, allowing for convenient pickup points.
Target finished last year with 115 small stores, meaning that figure could nearly triple to about 300 over the next five years, according to its growth forecast. If they were a stand-alone business, Cornell noted, their revenue would rival that of fast-growing chains with many more locations.
Target's owned brands, like Cat & Jack and Pillowfort, have also been a consistent bright spot for the company. Owned brands represent about a third of the company's revenue and even more of its gross profit, as private-label products are generally more profitable because the company controls the whole supply chain. Target now has more than 30 owned brands, and it continues to introduce more. 10 of those generate more than $1 billion in annual sales, and four topped the $2 billion mark.
Finally, Target is also filling the void created by the decline of department stores, partnering with popular brands like Levi's, Ulta, Apple, and Disney to set up shop-in-stores and highlight those brands in other ways.
For instance, Ulta is opening 100 stores inside Target locations this year, and the company expects hundreds more to follow as it learns what works and what doesn't with the small-footprint stores. It just rolled out a dedicated Apple experience in 17 stores, doubling the footprint devoted to Apple products, and it also recently launched its Levi's for Target collection, expanding its partnership with the famed denim brand. Meanwhile, its Disney partnership has been a winner during the holidays.
Because of its unique position as a mass market retailer with a "cheap chic" reputation that appeals to a wide range of customers, Target should attract more brands looking for the kind of exposures and sales boost a retailer of its size and reach can provide.
What the numbers will look like
Target's growth last year was an anomaly driven by the pandemic, but it should be able to keep much of the $9 billion in market share gains it made.
Prior to the pandemic, the company had grown revenue by close to 4% in its two previous years, so 4% top-line growth seems like a modest target over the next five years. Doing so would bring the company's revenue from $92.4 billion last year to $112.4 billion in 2025. Growing revenue by 5% annually would bring that number to $117.9 billion.
On the bottom line, management forecast an operating margin between 6% to 6.5% in 2021, down from 7% last year as it digested some of that growth, but the company should gain operating leverage as it adds sales on a mostly fixed store base and ramps up owned brands.
In a base case, the company should have at least a 7% operating margin in 2025, giving it at least $7.9 billion in operating profit. In a best-case scenario, Target's operating margin could increase to 9%, giving it $10.6 billion in operating profit, up from $6.5 billion, showing the company's profits would grow by about two thirds during that time.
Factor in consistent share buybacks, and Target's adjusted earnings per share could double over the next five years to $19 if it executes on its strategy. Investors will also benefit form a rising dividend.
Considering that the stock still trades at a modest price-to-earnings ratio of less than 20 and the momentum the retailer is carrying into the post-pandemic era after a spectacular 2020, Target continues to look like a smart buy. As the company begins another investment cycle, it could surprise investors once again.