Target Stock Still A Buy After 37% Pop Since October

Last October I urged investors to buy Target TGT shares. Since then, the stock has increased 37%.

Is it too late to buy? No. I think the reasons it has risen since October are still driving its growth. Since then there’s a new reason which played out in its latest earnings announcement: people are buying more at Target during the pandemic.

(I have no financial interest in the securities mentioned).

Target’s Second Quarter Financial Report

Target’s fiscal second quarter results exceeded expectations. Here are the highlights, according to CNBC:

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  • Revenue of $23 billion — 15% higher than expected
  • Same-store sales growth of 24.3% — 16.7 percentage points faster than expected
  • Adjusted EPS of $3.38, 108% higher than expected
  • Net income up 80.3% to $1.7 billion

The fastest growth was due to Target’s digital transformation — accelerated by the pandemic. Target’s curbside pickup soared more than 700%. Sales fulfilled by its online delivery service Shipt grew more than 350%. Target added 10 million new digital subscribers and it has taken about $5 billion in revenues from competitors, according to the Wall Street Journal.

CEO Brian Cornell told reporters that Target’s “mix of merchandise and online options resonated with customers who sought out safe and convenient ways to shop in the midst of the pandemic. The company benefited from its designation as an essential retailer during U.S. lockdowns that forced some competitors to close,” according to CNBC.

The dark note in this earnings call is the absence of guidance. As CNBC noted, Cornell “did not provide a financial outlook for the rest of the year, saying it’s hard to predict shopping patterns in light of the pandemic. For example, he said, families have delayed back-to-school shopping as many still wait to hear if their children will return to the classroom or attend school from home.”

Moody’s analyst Charlie O’Shea was pleased with these results. “Target’s Q2 performance obliterated the bullseye, with every line item vastly exceeding our expectations, resulting in first half performance actually improving from 2019 despite Q1’s very rocky start,” according to the Minneapolis Star Tribune.

The pandemic has been a key contributor to Target’s growth. So have the three factors I mentioned last October.

Brian Cornell’s Investments In Growth Have Paid Off

Cornell took over in mid-August 2014. He was popular with investors due to his initial moves to jettison businesses that he thought did not fit with Target’s corporate strategy. For example, he shuttered the Canadian operations and sold Target’s $4 billion pharmacy business to CVS Health.

Cornell also made big investments for growth. He created and sold Target’s board on a package of store improvement and other initiatives that would require $7 billion in capital spending and $1 billion in operating expenses over three years. The investment and bad earnings report caused its shared to plunge.

By the third quarter of 2019, Target had reported “eight straight quarters of comparable sales increases…growing faster than rivals such as Macy’s, Kohl’s KSS , and Walmart WMT .

Target’s investment continued yielding a competitive advantage in the latest quarter. Evercore EVR analyst Greg Melich said, “Target’s digital offer is working in tandem with their fleet of 1,900 stores and shows that the multichannel mojo is a strategic positive in the battle vs. Amazon and Walmart,” reported Reuters.

Making Omnichannel Work

Target’s rapid growth in the latest quarter comes from what the industry describes as omnichannel – which means that consumers can shop, purchase, and take possession of goods any way they want. In 2017, Target acquired Grand Junction, a software-based solution for retailers, distributors, third-party logistics providers, and consumers. As Ben Gordon, whose firm Cambridge Capital invested in the company explained in an October 18 interview, “Grand Junction gave Target the opportunity to provide customers an alternative to Amazon Prime AMZN .”

And in December 2017 Target added to its omnichannel offerings by paying $550 million to acquire $99 subscription same-day delivery service Shipt – which by March 2019 was available in 1,500 stores. And that month, consumers could order online and pickup at the curb in more than 1,000 stores, according to the Washington Post, which reported that using the stores as fulfillment centers costs Target 90% less than at warehouses.

As Tory Gundelach, VP of Retail Insights at Kantar Consulting, explained last October, “Omnichannel means consumers can do business with Target through bricks and mortar, online, voice, and mobile [among others]. To do this effectively, Target‘s front-end technology personalizes a customer’s experience so [she gets the] same message across all channels.”

This also requires changes in the so-called back end of the business. “Target has seven different fulfillment methods. [To execute well, Target] coordinates across the supply chain, logistics, fulfillment, and team members who pick and pack orders in the back of the store for curbside pickup and stack the store shelves.”

New Stores And Merchandise

Another new element of Target’s strategy is its 100 small stores in urban locations – these stores give Target access to customers in places where Walmart does not operate. The small stores generate nearly $900 in annual sales per square foot – about three times the figure for a typical suburban store.

The return to Target’s roots manifested itself across the board. Target articulated its mission – “to help all families discover the joy in everyday life” – which inspired and empowered more of its 320,000 workers. Target also refreshed its stores by getting rid of linoleum floors and displaying clothing on mannequins (it expects to do that for 1,000 of its 1,800 stores by the end of 2020), improved how it displays items to shoppers.

The company also brought back “Tarzhay” – its blend of private label – such as ts high margin $2 billion revenue children’s line Cat & Jack – and only-at-Target exclusives made by other companies. Collectively accounting for about 30% of sales, Tarzhay “gives shoppers a reason to come into its stores,” noted Gundelach.

Target also rolled out a new private grocery brand – Good & Gather – that will feature “more than 2,000 items without artificial flavors and sweeteners [as it phases out] stalwart private food brands Archer Farms and Simply Balanced,” according to Bloomberg.

And a Target spokesperson said that Food and Beverage is “a big reason our guests like shopping and we’ve been seeing consistent growth and market share gains in Food and Beverage for well over a year.” Several others love Target – one noting that it’s a social event for her and her friends and another who praised the store as a one-stop shop that is “very clean and organized.”

In the second quarter of 2020, these categories did well — but electronics grew fastest. Electronics — including home office items and video games — were up 70%. Other categories also enjoyed double digit growth — including home (30%), beauty (20%), food and beverage (20%), essentials (20%) and apparel (up “double digits”), noted CNBC.

Covid-19 Uncertainty Remains

Target is facing considerable uncertainty regarding back to school shopping demand. Cornell told reporters today that 66% of U.S. students are starting out the school year remotely. “Sitting here today, I don’t know if 30 days from now that number is going to be 6% or 96%,” he said. “So we’ve got to be flexible, we’ve got to be adaptable.”

Yet investors have sent its stock up 12% to a record today. I think it will go further.

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