Target (TGT +0.48%) was one of the prime beneficiaries of customer shopping during the pandemic. It was deemed an essential retailer and allowed to stay open when many others were forced to shut their doors.
However, investors worried that as economies reopen, sales may slump at Target. The theory was that consumers would have more places to spend their money once more businesses were allowed to open. That would leave less money in their wallet to spend at Target.
So far, that scenario doesn't seem to be playing out. In contrast, it looks like habits developed during the pandemic are sticking around, and that's great news for Target. In fact, that's the main reason Target stock is on fire in 2021.
Target's stock is up by more than 36% in 2021. Image source: Getty Images.
Habits obtained during the pandemic are sticking
Target's sales grew more in 2020 than they did in all of the last 11 years. In all, revenue grew by over $15 billion. And then in the first quarter, sales continued to grow on top of the excellent increase last year. The failure of sales to pull back even though states eased business restrictions in the first quarter was an encouraging sign.
To top that off, management told investors in the conference call that followed its earnings release that it expects revenue growth to continue for the rest of the year. In other words, management is not expecting a pullback from the surge in shopping caused by the coronavirus pandemic.
It appears habits formed during the pandemic by Target shoppers are sticking longer than expected. Another theory is that so many companies went out of business during the pandemic that consumers may not have the same choices they once did. Or perhaps it's a combination of the two. Regardless, it's good news for Target shareholders.
Management moved quickly at the onset of the pandemic to make its digital shopping experience fill the needs of consumers. Same-day delivery item availability increased. And the company quickly expanded drive-up, a service where customers can order online then drive to their nearest Target and have the item delivered to their car in the parking lot, usually within a few hours.
Those services, in part, led Target to gain $1 billion in market share in the first quarter of 2021. This is on top of the $1 billion it gained in the first quarter of 2020.
What this could mean for investors
Interestingly, Target management guided investors that its operating profit margin could reach 8% this year. That would be the highest the metric has been in over a decade. Although it may be too early to tell, it's looking like Target will be one of the long-run winners in the aftermath of the pandemic.
Target's stock is up around 36% year to date as of this writing. Still, it's trading at a reasonable forward price-to-earnings ratio of 19.64. Given its market share gains, developments in its omnichannel offerings, and a reasonable valuation, investors may want to consider adding Target's shares to their portfolio.
