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Target Stock Is Still a Buy

By Pearl Wang - Mar 21, 2021 at 8:10AM

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The big-box retailer's strategies should sustain revenue growth over the long term.

Target (TGT -5.06%), the eighth-largest retailer in the U.S. by sales, performed well in 2020, in part thanks to consumers stocking up on household items during the first half of 2020 at the start of the COVID-19 pandemic. Full-year fiscal 2020 revenue increased 19.8% with a 19.3% increase in comparable-store sales.

While the consumer-discretionary company did not give guidance for fiscal 2021, citing "continued uncertainty" (including the impact of COVID-19), its stores will likely see a boost as many states in the U.S. lift capacity restrictions and people do more in-person shopping. But that uncertainty is underlined by consensus analyst estimates, which call for revenue and earnings to decrease 2.8% and 7.7%, respectively, in the current year. However, analysts are also projecting a return to growth in 2022.

Here are three reasons the stock is likely to outperform in the long term.

Two Target employees put on personal protective equipment in the checkout section of a Target store

Image source: Target.

Taking a unique position in retail

The efficient one-stop shopping that Target offers its customers will still appeal to time-strapped shoppers seeking convenience and value as things return to normal in a post-pandemic world. This sets Target apart from smaller competitors and specialty chains.

The company also makes it as easy as possible for customers to shop at its stores with a well-established omnichannel strategy. Target takes full advantage of its large store footprint as there are "nearly 1,900 stores within 10 miles of the vast majority of U.S. consumers to offer the fastest and easiest digital fulfillment in retail." That reach has been essential as the company fulfilled 95% of its fourth-quarter revenue through its stores, including both in-store and online sales.

Consumers appreciate unique, quality product offerings at affordable prices, and Target excels in this market, in both good and challenging economic times.

Omnichannel and e-commerce will boost business

Expanding on the retailer's omnichannel offerings, CEO Brian Cornell recounted a comment from a Target shopper: "Please always continue to do curbside pick-up, it is such a help even outside of COVID. This is a wonderful service, and I'll continue to choose Target for this very reason." Digital growth was strong in fiscal 2020 with e-commerce sales up $10 billion, boosted by a 235% increase in same-day services.

This success has only been possible thanks to the company's substantial investments in technology, the supply chain, and store operations. "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 in the latest earnings call. Shipt, the same-day delivery platform Target acquired in 2017, also grew over 300% last year. These investments in conveniences like same-day delivery and drive-up services are essential due to how they influence shopper behavior: Customers using drive-up for the first time tend to spend about 30% more than prior to using the service, and management noted a similar trend for customers who use Shipt.

Target announced it is investing around $4 billion each year in capital expenditures that will further improve its multichannel capabilities, supporting sales growth as Target's multichannel customers spend about four times more than store-only shoppers and almost ten times more than digital-only shoppers.

CFO Michael Fiddelke detailed on the fourth-quarter earnings call:

We're planning for annual capex in the $4 billion range in each of the next few years to support remodels, new stores, and supply chain projects that add replenishment capacity and modernize the network, including sortation centers. Beyond full store remodels, we'll also invest in Ulta Beauty shop-in-shops while optimizing front-end space in our highest volume locations, increasing the efficiency of our pick-up and drive-up services.

Brand launches -- and partnerships -- have been a hit

Target has enjoyed lots of success with brand partnerships and its private-label offerings. The latter effort includes six in-house brands that now generate $1 billion or more in annual sales. Impressively, its All In Motion athleisure line launched in 2020 and hit the billion-dollar benchmark by Feb. 2021.

The company continues to use this formula with its brand partners too, launching "dedicated Apple experiences" in 17 stores earlier this year. While Target has worked with Apple for over 15 years, this new effort will double its footprint, including new displays for Apple products and more extensive accessory offerings. Apple will also have a dedicated landing page on Target's digital channels.

And on Feb. 28, the retailer rolled out an exclusive, limited-edition home and lifestyle collection as part of its partnership with Levi Strauss & Co, expanding an ongoing partnership with the denim brand that began in 2011. This exclusive line is the first home collaboration with Levi, and it offers Target customers yet another unique offering with exclusive products.

Overall, Target is in a strong position to extend the streak of top- and bottom-line growth it experienced over the past year. The formula that combines a one-stop shop of well-curated, popular items with ultra-convenient fulfillment has won over millions of consumers, and the company can build on its recent momentum to gain market share long term.

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Stocks Mentioned

Target Corporation Stock Quote
Target Corporation
TGT
$153.43 (-5.06%) $-8.18
Apple Inc. Stock Quote
Apple Inc.
AAPL
$137.35 (-2.46%) $-3.47
Ulta Beauty, Inc. Stock Quote
Ulta Beauty, Inc.
ULTA
$351.31 (0.24%) $0.86
Levi Strauss & Co. Stock Quote
Levi Strauss & Co.
LEVI
$16.39 (-2.32%) $0.39

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

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