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Target's Q3 Operating Income Doubles From 2019

By Parkev Tatevosian, CFA – Nov 22, 2021 at 7:54AM

Key Points

  • Target is on the way to reaching its highest operating profit margin in the last 10 years.
  • Its operating profit margin has been closely connected to its stock price.
  • The company is handling rising costs skillfully.

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The retailer has made strategic investments that are paying off both on the top and bottom line.

Target (TGT -2.35%) reported fiscal 2021 third-quarter results before the market opened on Nov. 17. The announcement revealed the company continues pushing profits higher as consumers are flocking to its stores.

Target has been one of the beneficiaries of the coronavirus pandemic. The company is experiencing surging sales at a rate much faster than its average over the last decade. The rapid top-line growth is flowing to the bottom line, and the company is on its way to achieving record profits for the year. 

Two people shopping in a store.

Image source: Getty Images.

Target is skillfully handling inflationary pressure 

Interestingly, before the fiscal year 2021, Target had not eclipsed 8% in operating profit margin at any time in the last 10 years. However, the consumer enthusiasm for shopping at Target was robust enough for management to tell investors it would make at least 8% in operating profit margin this year. And despite widely reported rising costs associated with supply chain bottlenecks worldwide, management reiterated its confidence in reaching that goal.

Target CEO Brian Cornell talked about rising costs during the company's third-quarter conference call: "Beyond our supply chain, the team has done a great job navigating through broader cost pressures as many vendors have raised wholesale prices to accommodate higher costs within their businesses. As our team faced these cost increases, they maintained a guest-first approach and a focus on value while managing overall profitability as well." 

Whenever a business faces rising costs, it can choose to absorb the costs and accept lower profit margins, raise prices to sustain profit margins, or a mix of both. From what Cornell said, it appears that Target is taking a combination of both approaches. Of course, when a company increases prices, customers typically buy less. So management has to be careful in how and when it raises prices on products. 

Target is handling the challenge skillfully. Sales increased in its most recent quarter ended Oct. 31 by 13% from the same time last year. Meanwhile, its operating margin in the third quarter was 7.9%, only 70 basis points below the previous year's level. The balanced approach is working well for the retailer, and its operating income has more than doubled from the same quarter in 2019.

Target's operating profit increases boost its stock price

Significantly, Target's operating profit margin was declining over the last decade, before the pandemic's onset. The trend coincided with a shift in consumer behavior away from shopping in person to shopping online. Target, realizing this trend, has made investments to make the company more digital-friendly.

Specifically, the features that are driving sales and profitability higher are its same-day services. These give consumers a choice to buy online and pick up in-store, deliver to their car in a Target parking lot, or deliver to their home within hours for a small fee. In its most recent quarter, sales driven by same-day services grew by 60% from last year, where they had grown by 200% from the year before that.

A chart showing Target's operating profit margin and its stock price.

Data by Ycharts.

The convenience attracts shoppers to Target, and sales fulfilled by same-day services are more profitable for the retailer, a true win-win. If the trend continues, it could sustain operating profit growth for Target, which is good news for shareholders considering how closely connected the metric is to its stock price (see chart). 

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.

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