Target (TGT -0.70%) shares jumped on Tuesday as the company laid out its long-term growth strategy and upped revenue and earnings-per-share growth targets.
The omnichannel retailer has been a standout performer during the pandemic with adjusted earnings per share doubling and growth in its same-day fulfillment services up nearly 600% over the last two years. But beyond the headline numbers, there are some under-the-radar factors that should also strengthen investor confidence in the stock this year. Let's take a look at a few of them.
Image source: Target.
1. Starbucks pickup
Drive Up, Target's curbside pickup program, has been its biggest growth driver of the past two years with sales up nearly 1,300% during that time. Other retailers offer curbside pickup, but most don't have the breadth of merchandise that Target has; nor do they have locations spread across all 50 states with a mix of urban, suburban, and rural locations.
Target is about to make Drive Up even more enticing by adding Starbucks delivery to it, giving it a benefit that no other retailer can match. At least 1,300 out of Target's 1,926 stores have a Starbucks cafe, and the company will soon allow customers to make Starbucks orders along with their Drive Up orders.
On the Target earnings call, the company described it as a pilot program that it will test in select markets this summer and fall although it said the ultimate goal was to make it available nationwide. The program seems likely to be a big winner with customers, giving the company another unique competitive advantage.
2. Ulta Beauty expansion
Brand partnerships like those with Starbucks and CVS are another strength of Target's, and last year the company launched a shop-in-store partnership with Ulta Beauty, a leading retailer of beauty products and services.
The program initially launched at 100 Target stores last August, and management has been happy with the results, saying that sales per square foot are strong and the customer response has been positive as well. It's seen a mid-teens increase in beauty sales at stores with Ulta shops and complementary benefits in other categories as well.
The company plans to add 250 new Ulta stores in Target locations with a goal of reaching 800 in total. That expansion should drive traffic for the company, both for in-store customers and for services like Drive Up. Target's "cheap chic" brand helped it attract a partner like Ulta whereas a competitor like Walmart probably couldn't.
3. The ad business is ramping up
Amazon has built a multi-billion-dollar business by opening up its e-commerce site to advertising, and in fact, it's now the third-biggest digital advertising business behind Google and Meta Platforms. Walmart has followed suit, taking control of its own media group in order to tap into the potential of advertising. Now, Target appears to be doing the same.
On the earnings call, the company said that Roundel, its media arm formerly known as Target Media Network, delivered more than $1 billion in value last year and was the second-biggest component in its $1.4 billion of "other revenue" after credit cards. Management said it expected Roundel's value to grow to $2 billion in the next few years, explaining that in addition to the revenue it brings in for Target, it also adds value for its suppliers and customers.
Nearly 20% of Target's sales now come through the digital channel, so it makes sense for the company to monetize that through advertising, much in the way that Amazon and now Walmart are doing. Target's advertising business will never be as big as Amazon's, but the template is there for a high-margin business to attach to its e-commerce platform.
The pandemic tailwinds are fading, and challenges with the supply chain, cost inflation, and labor shortages are mounting, meaning Target's growth rate in 2022 will likely be closer to historical norms. However, the company keeps finding new ways to differentiate itself from the rest of the retail industry, and that will continue to pay off for investors.
