In a season of strong retail earnings reports, Target (TGT +0.42%) again outdid the competition.
The big-box chain has been one of the biggest winners among brick-and-mortar retailers over the last year, with share prices up 74%. Target's price rose another 6% after its first-quarter earnings report, and it's easy to see why.
The company smashed expectations. Comparable sales jumped 22.9%, well ahead of estimates at 11.9%, and that comes after 10.8% growth the year before, giving the company two-year comp sales growth of over 35%.
Revenue was up 23.4% to $24.2 billion, outpacing estimates at $21.8 billion, while adjusted earnings per share jumped to a quarterly record of $3.69, beating the consensus at $2.25. The period marked Target's fifth straight quarter of double-digit percentage comparable sales growth. In the words of CEO Brian Cornell: "Our performance in the first quarter was outstanding on every measure, and showcased the power of putting our stores at the center of our strategy."
Image source: Target.
Here are three reasons why Target delivered another stellar quarter.
1. Omnichannel execution
Though Target may be best known for its brick-and-mortar stores, the company has invested billions in its e-commerce infrastructure to move closer to a hybrid, omnichannel model.
During the pandemic, both in-store and online sales have thrived, and the two channels complement each other more than they do at most retailers. Stores fulfill nearly all of Target's sales, including those that take place online. In the first quarter, stores fulfilled 96.3% of the company's sales, even though only 81.7% of its sales originated in its stores.
That strategy of using its stores to fulfill online orders has made Target much more profitable than its closest peers, including Walmart, Costco, and Amazon's e-commerce division. In the first quarter, Target's operating margin came in at 10%, well ahead of its rivals, and a big reason for that performance was its omnichannel strategy.
2. Same-day services are thriving
A key component of Target's store fulfillment strategy is its same-day services, including Drive Up, Order Pickup, and same-day delivery from Shipt. Sales from same-day fulfillment services have surged during the pandemic, and that pattern continued in the first quarter, growing 90% in the quarter, on top of 278% growth in the first quarter a year ago.
In other words, same-day services are up more than six times in just two years. Drive Up, which has seen the strongest growth, was up 123% in the first quarter, lapping 600% growth in the quarter a year ago. Customers who have tried these services clearly like them and are continuing to use them, which is why they've experienced such strong growth, even in the quarter that lapped the lockdowns of a year ago.
Same-day services now make up more than half of the company's digital sales, or roughly 10% of total revenue, and they act as a competitive advantage against Amazon, which only promises one-day delivery through Prime and doesn't have the same network of stores to facilitate same-day pickup.
3. Owned brands are booming
Another thing that helps differentiate Target from most retailers is the success of its private brands. Target now has 10 exclusive brands that each generate more than $1 billion in annual sales, showing the company's ability to create new consumer products in addition to selling them. Owned brands give Target a competitive advantage for two reasons. First, they give customers a reason to shop at its stores, as Target has products that aren't available anywhere else. Second, because Target controls the supply chain with owned brands and doesn't have to buy them from a wholesaler, the company makes higher margins from them.
In the first quarter, Target saw record growth from owned brands as sales rose 36% year over year, showing that they were a major driver of both sales growth and profitability. Cornell said on the earnings call:
Because of our unique capabilities in product design, development, and sourcing, our owned-brand products offer an unbeatable combination of design, quality, and value. These brands aren't something that our guests pick up while they're at Target, they're a big reason why they shop at Target, which is why we continue to invest in them.
Target management also issued strong guidance for the rest of the year, calling for mid-to-high comparable sales growth in the second quarter, on top of a strong performance in the quarter a year ago. It said comps would be positive in the second half of the year. For the full year, management targeted an operating margin of 8% or better, up from 7% a year ago.
Following the blowout quarter, the retail stock continues to look like a bargain, trading at a price-to-earnings ratio of 17.5. Though the company will lose some of the pandemic-related tailwinds, the strategies above, as well as its expansion of its small-format stores, make it well-positioned for long-term growth.
