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Target Has Another Excellent Quarter; What's the Secret Sauce?

By Parkev Tatevosian, CFA – Aug 23, 2021 at 12:51PM

Key Points

  • Target is guiding investors to look for the highest annual profit margin in at least a decade.
  • Target stock is trading at a favorable forward price-to-earnings ratio of 19.5.
  • Target's stock price is up over 43% in 2021.

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The retail giant's CEO cannot point to one thing, but same-day fulfillment options are a huge driver of success.

Retail giant Target (TGT -0.53%) continued its excellent operating performance in the second quarter, reporting year-over-year comparable-store sales growth of 8.9% on top of the 24.3% growth it reported last year. The measure, which accounts for increases in sales at stores open for the previous 12 months, was fueled in part by consumers returning to shop in stores.

Target is, of course, making every effort to welcome shoppers back with open arms. Economic reopenings and mass vaccinations against COVID-19 give people the confidence to go out and into stores again. So how has Target been able to sustain excellent performance? Let's look closer at second-quarter earnings figures to find out. 

Two people looking at clothing in a store.

Image source: Getty Images.

A little bit of everything contributed to Target's strong Q2

During the company's second-quarter conference call following the earnings release, CEO Brian Cornell discussed what he thought was leading to Target's success

The honest answer to that question, we can't point to any one thing. Rather, it's been everything working together that's driven our performance. This includes our supply chain work, which has positioned our stores as fulfillment hubs while transforming the way we replenish store inventory. Then there's our rollout of same-day services, which began more than five years ago with in-store pickup, followed by the nationwide rollout of Drive Up and Shipt beginning in 2018.

Indeed, flexibility in fulfillment options has been a huge success. Drive-up sales, where customers can make a purchase online and then drive to a Target parking lot the same day and have an employee deliver the item to their car, were up 80% year over year in the second quarter, on top of the whopping 700% increase at the same time last year. Target's Shipt service sales, where folks can order online and have it delivered to their home on the same day, increased by 30% in Q2, after increasing 350% last year. And finally, sales for orders made online and picked up inside the store increased by 20% in Q2, on top of 60% growth last year. 

The phenomenal success of these services highlights consumer desire for convenience and options. The more choices you give consumers, the more sales you are going to capture. 

What this means for investors

An additional benefit of the same-day fulfillment options Target is rolling out is that they can be more profitable than traditional online sales. It costs Target more to ship items to people's homes than it does when people come to pick up the item in the store. And while drive-up and pickup in-store are free options, people have to pay for the same-day delivery via Shipt. 

The proliferation of these services undoubtedly contributes to Target's bullish expectation of achieving an operating profit margin of 8% or higher in 2021. Over the last decade, the highest it has reached in this metric was 7.6% in 2012 and 2013.

Target's stock price is up about 43% year to date with good reason. The company is doing an excellent job adjusting to changes in consumer preferences. Despite the increase, the stock is still trading at a favorable forward price-to-earnings ratio of 19.5. Investors cannot be blamed for buying the stock at this price. 

Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Stocks Mentioned

Target Stock Quote
Target
TGT
$164.16 (-0.53%) $0.87

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