Target’s Innovation Continues to Drive Value

 

David Trainer, Contributor, Forbes

Sep 18, 2019

 

Target Corporation’s (TGT) stock gained 20% on August 22 after the company beat expectations for earnings and revenue and raised its guidance for the rest of 2019.

 

This strong quarter reaffirms my belief that Target can continue to grow and create value for shareholders by innovating the retail experience. The retail giant continues to adapt to the changing industry through omnichannel delivery options, store redesigns, small store formats, and, most recently, a partnership with Disney (DIS). Target Corporation is this week’s Long Idea.

 

Growth and Margin Expansion at the Same Time

 

I selected Target as a Long Idea on June 5, 2019 in my article “This Retail Giant Is Firing on All Cylinders”. At the time, I was bullish on the company’s solid revenue and profit growth. Specifically, I singled out Target’s e-commerce efforts, which included traditional delivery, in-store and curbside pickup, and same-day delivery through its acquisition of Shipt.

 

One question I received from readers was “Is there a concern that margins will face pressure as the total share grows to more e-commerce?” It’s a fair question. After all, it seems like the costs of these e-commerce efforts, especially same-day delivery, would likely offset some of the growth they deliver.

 

Target’s Q2 earnings highlight the company’s ability to overcome these challenges. Target delivered solid growth – comparable sales up 4.1% year-over-year (YoY) and total sales up 4.3% through the first six months of 2019 – with margin expansion at the same time. Figure 1 shows that revenue through the first six months of the year grew faster than every major expense – cost of goods sold, selling, general, and administrative (SG&A), and depreciation and amortization (D&A).

 

Target’s revenue growth rate has outpaced expenses despite the fact that digitally originated sales rose from 5% of revenue in the first half of 2018 to 7% in the first half of 2019. Same-day fulfillment services – which include curbside pickup, in-store pickup, and Shipt – doubled year-over-year.

 

As management noted in the Q2 earnings call, digital fulfillment costs provided ~30 basis point headwind to Target’s gross margin in the quarter. This headwind was more than offset, though, by improving efficiencies on the merchandising side, price increases, and a favorable shift to higher margin apparel products.

 

The company’s strong performance is especially notable given that it comes on the back of an especially strong first half of 2018, where comparable sales grew by 4.8%. Over the past two years, comparable sales have grown by nearly 10%.

 

Taken as a whole, this earnings report demonstrates that Target doesn’t need to sacrifice margins in order to capitalize on e-commerce and grow its business.

 

New Store Formats Drive Growth ...

 

Disney Partnership Is a Slam Dunk ... 

 

Management Focused on the Right Metrics ...

 

Reduced Tariff Threat Is a Positive ... 

 

Target Remains Undervalued ... 

 

Cheap Valuation Provides Upside ... 

 

Potential for Dividend Growth is Strong ... 

 

more, including links, table, chart

https://www.forbes.com/sites/greatspeculations/2019/09/18/targets-innovation-continues-to-drive-value/