Target Rides the New Trend in Retail

GuruFocus.com
·3 min read

- By Panos Mourdoukoutas

Target Corp. (NYSE:TGT) has been riding a new retailing trend, the merging of traditional brick-and-mortar retailing with online.

For years, traditional retailers like Target, Walmart (NYSE:WMT) and Best Buy (BBY) have been losing sales to Amazon (NASDAQ:AMZN) as they couldn't match the online giant's prices and speed of delivery.

In the last couple of years, however, traditional retailers have changed the game. They have expanded their online presence while turning their stores into fulfillment centers. This means merging online and off-line sales and speeding up the delivery time. Customers can order things online and pick them in the store the same day or have products shipped to them for same-day delivery from the store.


An Elastic Path report finds that 75% of consumers expect, in the next 12 months, all brands to offer same-day delivery, and 72% expect a curbside pickup in the same time frame.

So far, this trend has performed miracles for all major retailers, especially for Target, which has seen its competitive advantage strengthened in recent years, as measured by economic profit, the difference between the return on invested capital and the weighted average cost of capital.

Meanwhile, Target recently reported strong holiday sales.

Compared with last year, the company's sales grew 17.2% for the November-December period, reflecting comparable store sales growth of 4.2% and comparable digital sales growth of 102%. Most notably, close to 95% of Target's sales were fulfilled by its stores.

In a statement, Chairman and CEO Brian Cornell cheered the company's strong performance:


"The momentum in our business continued in the holiday season with notable market share gains across our entire product portfolio. We're very pleased with our results, and the strength of our performance is a reflection of the tireless work of our team to support our guests through a safe, convenient, and inspirational experience. Throughout the holidays, we delivered joy for holiday shoppers while focusing on safety -- adjusting promotions to reduce crowding while delivering easy, contactless fulfillment options through Drive Up and Shipt."



Apparently Target's strategy got a big boost from the pandemic, which accelerated this new trend of merging online retailing with traditional retailing. Will that continue once the pandemic is over?

Cornell thinks so. "We've seen strong sales trends in the new year, and as we turn to our 2021 plans, our team is focused on continuing to build on the guest engagement and significant market share we gained throughout 2020."

Quo Vadis Capital President John Zolidis agrees.

"As we look into 2021 and a post-vaccine consumer environment, there are questions about which companies will hold onto customers and profitability gained during the crisis," Zolidis said. "This is where Target stands out, in our opinion. Its results have a feeling of durability."

He expects Target to earn $9 to $10 per share and free cash flow over the next three years, and a $200 per share valuation, not too far from the current levels.

Disclosure: I own shares of Target.

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This article first appeared on GuruFocus.