Target (NYSE:TGT) last week announced surprisingly strong holiday earnings results, powered by rising store traffic and a big spike in online orders. The good news helped the stock continue trouncing the market: Shares are up 2% in the last year compared to a 7% decline for the S&P 500.
CEO Brian Cornell and his management team held a conference call with analysts to put its fourth quarter results in context. Here are a few important highlights from that chat.
Packed shelves, higher traffic
"Traffic was the primary driver of our comp growth, up 1.3%, building on a really strong 3.2% increase last year. This quarter marked our fifth straight of traffic growth." – Chief Financial Officer Cathy Smith
Target and competitor Wal-Mart (NYSE:WMT) both posted their fifth consecutive quarters of traffic growth over the holidays, but Target's increase (1.3%) was twice that of its larger rival (0.6%). That gap explained most of the difference in overall comps for the two retailers: 1.9% for Target vs. 0.6% for Wal-Mart.
Plenty of strong execution had to go into that market-beating result, but one enduring improvement that executives highlighted had to do with product availability. Target's out of stock metrics on popular items were 40% better, year-over year. "This isn't an example of temporarily adding resources to work around systems and processes," said Chief Operating Officer John Mulligan. "Rather, this is a case of making improvements to those systems and processes to support a sustainable improvement in performance."
Simple holiday promotions
Digital sales spiked higher by 34% -- on top of the prior year's 36% gain. That growth trounced Wal-Mart's 8% global uptick, and even outpaced Amazon.com's (NASDAQ:AMZN) 15% jump. It also helped Target's e-commerce channel soar to 5% of all sales from 3.7% last year.
Target achieved those impressive results through a broad and simple Cyber Monday promotion -- 15% off of everything -- that resonated with shoppers.
The retailer is also getting much better at using its stores as fulfillment centers for online orders. In fact, nearly half of its "pick up at store" orders were for items that were out of stock at its web fulfillment centers.
"This preserved sales on orders we would have otherwise missed had we only accessed inventory in our web fulfillment centers," Mulligan explained.
A more normal profit margin
"Last year's stronger than expected comparable sales growth drove very strong gross margin rate performance in fourth quarter 2014, as regular price selling on seasonal items was unusually high. This year, with sales in line with our expectations, our gross margin rate reverted to a more normal level, given the competitive dynamics we faced in the fourth quarter." – CFO Smith
Gross margin slipped by 60 basis points to 27.9% of sales, which management referred to as "normal," given the intense competition in the industry. As is usual for retailing, especially around the holidays, Target had to cut prices aggressively to fend off rivals. But this headwind was offset by strong growth in the company's high-margin categories like style, kids, and wellness. These signature product lines grew at a hefty 7% pace in Q4.
Increasing cash returns
"Our business results and cash position enabled $1.3 billion in share repurchases in the fourth quarter, meaning we returned more than 110% of our net income through dividends and share repurchases." – CFO Smith
Between dividends and stock buybacks, Target returned $1.6 billion to shareholders in Q4, yet its cash on hand nearly doubled, year-over-year, to $4 billion. That happy result was driven by robust earnings: Profit improved from $2.4 billion in 2014 to $3.3 billion last year, equating to an 11% jump in adjusted earnings to $4.69 per share.
Unusually strong profit growth in 2016
"We expect to deliver full-year 2016 adjusted EPS of $5.20 to $5.40 ... I would note that this performance would exceed our longer term financial [goal] to generate annual adjusted EPS growth of about 10%." -- CFO Smith
Management targets comps growth of 2% this year, or right in line with 2015's gain. Yet earnings growth should accelerate to 13% from 11% last year.
That's above Target's long-term goal of roughly 10% profit growth, but increased stock buybacks will boost this year's reported earnings. As for the online sales channel that helped results so much in Q4, management declined to forecast growth there because it's getting harder to draw the line between a digital and a traditional sale. Yet the CFO assured investors that "our commitment to digital is as strong as ever."
Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.