Investors had high expectations approaching Target's (TGT 0.18%) holiday season quarterly report -- and they weren't disappointed. The retailing giant grew its sales base on top of booming results a year earlier. It also avoided major supply-chain challenges while passing along most of its rising costs.
The 2022 outlook is just as good although shareholders will see slowing growth and declining profit margins over the next quarter or two. Let's dive right in.
1. Sales were strong
Target is still growing faster than it was before the pandemic and beating most of its peers. Comparable-store sales rose 9% in the quarter, which looks great when stacked up against Walmart's 6% increase.
Image source: Getty Images.
The retailer got help from its popular online-selling platform that gives shoppers the flexibility to order almost anything in its catalog and pick it up at their neighborhood location. These digital sales, which often involve a physical trip to the store, rose 9% and now account for about 22% of Target's business.
Customer traffic was another standout growth metric. Target handled 8% more transactions in Q4 while average order spending rose. Walmart, for context, boosted traffic by 3% over the holiday period. Target CEO Brian Cornell said in a press release, "Our strong fourth-quarter performance capped off a year of record growth." Target achieved annual sales of $106 billion in 2021 compared to $78 billion two years ago.
2. There were slight profit challenges
Target wasn't immune to cost pressures, including spiking labor and transportation expenses. But its rising market share helped cushion the blow from inflation.
Gross profit margin fell to 26% of sales from 27% a year ago while expenses shrank slightly as a percentage of sales. As a result, bottom-line profitability rose, landing at 6.8% of sales compared to 6.5% in late 2020. Target's per-share earnings rose 18% to $3.28 per share, with gains here being amplified by management's stock buyback spending.
TGT Operating Margin (TTM) data by YCharts
3. The outlook is positive
Management's 2022 outlook contained plenty of good news for investors. Sales will rise by around 5% this year after jumping 35% since 2019. That forecast implies that the company will keep most of the extra market share it accumulated during the earlier phases of the pandemic.
Investors can't count on profitability climbing toward double digits, though. Operating margin in Q1 will be "well below" the prior year's record mark of 9.8%, management warned. It will become harder to push margins up when Target isn't expanding its sales footprint by 10% or more.
Still, even if the retailer's profitability settles to below 8% of sales, that still means a much bigger earnings level than shareholders saw in 2019. Target's premium merchandise, plus its popular ultra-fast delivery options, are lifting its margins away from peers like Walmart.
That positive trend might slow in the first half of 2022. But investors have good reasons to believe Target can maintain its market share momentum and avoid a big growth hangover this year.
