Target (TGT 0.18%) demonstrated once again in the 2021 fourth quarter that it can grow under challenging circumstances. It increased profitability when costs were rising and the supply chain was dragging down other retailers.
There are key features that make Target stand out among retailers, contributing to its strong growth and profitability -- and they remain crucial to its continued success. Let's look closer.
An employee for Target's Shipt delivery service. Image source: Target.
Another great quarter
We're well past Target's pandemic-induced sales growth as customers hoarded essentials. But while growth has slowed as expected, it remains robust on top of the previous year's solid rise.
Sales increased 9% year over year in the fiscal fourth quarter (ended Jan. 29) with comparable-store sales growing 8%. Full-year revenue crossed $100 billion for the first time, building on last year's momentum.
The gross margin contracted from 26.8% last year to 25.7% this year due to increased costs from supply-chain backlogs as well as wage increases. But net income increased 12% year over year to $1.5 billion, and earnings per share (EPS) of $3.21 beat average Wall Street estimates of $2.84.
For the future, management expects a further deceleration. It's building on two years of strong growth and dealing with uncertainty from continued supply-chain issues as well as global macroeconomic volatility. It's guiding for revenue growth in the low- to mid-single digits and adjusted EPS growth in the high single digits. (Adjustments take into account taxes and other matters that the company terms insignificant.)
Investors cheered the results, which showed sustained growth despite the company's calls for a slowdown in guidance for 2022, and Target stock ended Tuesday up 10%.
How Target does it
The features that makes Target function like a well-oiled machine also contribute to a model that contributes to high profits. It has perhaps the most competitive omnichannel model, a range of store sizes to meet demographic demand, a varied collection of owned brands, and an in-store fulfilment model.
Target heavily invested in its omnichannel network starting in 2017, and that played a pivotal role in it success last year. Its suite of options include online shopping as well as same-day pickup, drive-up, and home delivery for a growing list of products.
While same-day services sharply decelerated in the fourth quarter, they were still up 45% year over year vs. a gain of 235% a year earlier. On a full-year basis, same-day services were up 70% in 2021 vs. 600% in 2020.
And the retailer is working on more capabilities, such as adding product returns and Starbucks coffee orders to its drive-up service in 2022.
The company has also been piloting a small-store model (defined as under 50,000 square feet) in many areas, and its success is leading to more of these stores. About 25 new ones are planned right now out of about 50 total stores to open soon. The others are standard, large-size stores. This model allows Target to meet demand in urban areas where it would be impractical to open large stores. A product selection targeted to a specific area also makes these small stores efficient and offers a well-allocated use of capital.
The company's own brands are another linchpin in Target's model. They provide high-quality products at competitive prices, serving a few purposes. They bring in customers because they are exclusive, Target can better manage them because it owns them, and they boost profitability since there are no middlemen. Owned brands made up almost a third of total sales in 2021.
Lastly, Target ships 95% of online orders from its stores, making it less reliant on third-party fulfillment services or investments in large distribution centers. And since orders are being shipped from local stores, delivery is faster.
Big prospects for more
Target is well-positioned to keep building on its success. The stock has been a winner, outperforming the S&P 500 over the past five years and gaining 280%. Even better, it trades at only 16 times trailing 12-month earnings, a low premium for a reliable stock. It also became a Dividend King when it raised its dividend for the 50th consecutive time in 2021. Target is likely to keep posting sales and profit growth for many years.
