This Retail Stock Is Fresh Off a Huge Year

Target (TGT -0.61%) has excelled at maintaining a strong in-store customer presence while also growing it's e-commerce business online. In this Motley Fool Live segment from "The Virtual Opportunities Show," recorded on March 1, Fool.com contributors Rachel Warren, Jose Najarro, Travis Hoium, and Demitri Kalogeropoulos discuss what's driving Target's success.  

Rachel Warren: Target reported earnings for the fourth-quarter and full-year 2021 today, and I just checked the stocks up more than 10 percent today. Clearly, the market was happy with what Target had to say. I was as well. This is one that's been on my radar for a while, I'm going to touched the few quick highlights here. Target reported $106 billion in total revenue for the full-year. One of the things that's interesting about that number is Target was saying they have grown their revenue more than 35 percent over the last two years. One of the things that's been really big for Target, this was one of those stores that was deemed "essential retailer" in the earlier days of the pandemic. It didn't face those same headwinds from closures, that other brick-and-mortar stores did. The company also has a really strong online retail presence, which is continuing to add to its overall growth. All five of its core merchandise categories delivered double-digit comparable sales growth in 2021.

The other thing that's interesting is that its operating income margin of 8.4 percent, that was up 150 basis points from 2020. Another thing that really stuck out to me, so, it did some comparisons to pre-pandemic. The company said, total sales have grown more than $27 billion since 2019, that is attributable to more than 14 billion of additional store sales. But 13 billion of that is from digital sales growth, just since 2019. One of the things that I love about this company is just the fact that it's done such a good job of not only really maintaining that strong in-store customer presence, but also people shop online at Target all the time. When I'm back in the States, I use Target mostly online. I do go in-person sometimes, but I just like the use of it, and just the accessibility of being able to shop online.

A couple of other things of note, traffic on Target was up 12.3 Again, double-digit comp sales growth across all five core categories. That's apparel, food and beverage, essentials and beauty, home, and then its hardlines. In addition, $30 billion in owned brand sales in 2021 Target reported, that was up 18 percent. Another thing that was interesting, 95 percent of Target's total sales for 2021 were fulfilled by its stores. Finally, the company noted that same-day services are becoming a really huge and fast-growing part of its overall business. Management said that they experienced 45 percent growth in same-day services on top of 235 percent growth in this area in 2020. Again, you're looking at those 2020 comparisons where presumably you had people rushing in store to grab items for the apocalypse and then you also had people that were just shopping online. Even with those 2020 comparisons, things are going really, really well.

One final note, this is a nice dividend stock, I think last I checked its yield is about 1.6 percent. Over the last few years, it has beat the total return of the S&P 500 by quite a lot. Really great quarter and great year for Target. I think investors should be very pleased with how the stock is doing.

Jose Najarro: It's crazy. I'm not much of an in-store purchaser, but I went to Target a few weeks ago and it was just a random day and there was a crazy line. It seems like more people are becoming Target shoppers. I do like one thing you mentioned there, Rachel. They're seeing a huge increase in same-day delivery, not same-day delivery but same-day options. Sometimes it gets me wondering, we all thought that Amazon was going to be this amazing giant. Not saying anything bad against Amazon, but I think some of these e-commerce are getting ready to take at least some customers there with the overall same-day delivery system or the same occupation. I used to purchase from Amazon because of the reason that they had quick delivery available, but now I feel like every e-commerce or even regular stores that I go to have the same optionality which gives me a little bit more decisions on where to purchase from.

Rachel Warren: What's interesting is like when Target acquired Shipt which is the app that basically you want to order groceries online, you can get them delivered through Shipt. If you want to order basically any product in store, you do it through that mechanism. I've used that service there before, again, that same-day delivery service you were talking about and basically you have the option. If you use it regularly, you can subscribe I think monthly for 999 a month or you can pay a one-time fee I think of maybe $10, I can't number off the top of my head each time you use it in addition to other taxes and fees. You wonder, could that area of its business which has seen such tremendous growth, definitely lower than in 2020, but still 45 percent in 2021 compared to the prior year. You got to wonder, could this potentially make it that aspect of its business the to competitor to some of these other delivery services? Let me not quite like Uber Eats, but you what I'm saying in that similar way.

Travis Hoium: Like DoorDash.

Rachel Warren: Yeah.

Travis Hoium: I think the real story here is Target. This started five or six years ago, them figuring out how to leverage the fact that they have stores in really desirable locations. I shop at Target all the time. My wife works there so we're a Target family. But we use Pickup all the time and if you decode their earnings report which is hard to do, a lot of their growth is in Pickup. Target's headquartered here in the Twin Cities so we get an early taste of a lot of the things that they are working on here. They are reconfiguring every store around here so that you can just drive in, park, pop your trunk, somebody will put your groceries, clothes, diapers, whatever you want in your trunk and you never have to get out of that car. From a reporting standpoint, that's a digital sale, but it's fulfilled by the store. I think you have to parse the numbers there a little bit, but that's a huge part of their growth, it's basically taking a sales that may have gone to an Amazon. I don't need diapers today, but I'm going to stop by Target anyways and oh, by the way, maybe I'm going to Target to pick up milk instead of going to the grocery store. I call them grocery plus and then you add on this, I don't have to get out of the car aspect.

Not only am I likely to be a Target shopper because I'm literally driving by so I might as well stop and pick up a couple of food items that we need for the day, but while I'm there, I might as well get whatever other personal items or electronic items you might want. By the way, you don't even have to get out of the car anymore. It's the steps along the way of them figuring out how to leverage the fact that they've got all these stores, they have things that people want to buy, you just have to make it convenient enough. They started to figure it out. If you remember early in the pandemic, they had a ton of issues with inventory; they didn't have their inventory right. You would order something and it'd be like, "Just kidding we don't actually have that." It seems like the back-end piece is fully fixed is the right way to think about it. They're not a digital operator the way that Amazon is, but they are at least functionally good enough in improving I think is the way to think about it. But yeah, I like the position they're in. I like that Grocery Plus space and I like any business that's marrying the idea of, I can purchase it online and have somebody put it in a car for me. I don't like to go into the store. [laughs]

Rachel Warren: I feel that. I know it. I like to just sit and have things brought to me so they may [inaudible 07:44:41] me. [laughs]

Demitri Kalogeropoulos: That's great. Just to highlight there that eight percent customer traffic number for the fourth quarter just looks good compared to Walmart, it looks good compared to Home Depot, that's better than Costco. Those numbers are insane, so they're clearly doing something right and I think that e-commerce space is a big part of that.