Target gives bulls another reason to cheer
Investors had high hopes before Target‘s (NYSE: TGT) second quarter results, and the Wall Street favorite did not disappoint. Sales growth has been strong, even compared to strong demand a year ago. And Target’s profit margins continue to rise despite higher expenses.
These victories allowed CEO Brian Cornell and his team to project an excellent second half of the year ahead, one that could generate even more gains for shareholders. Let’s take a closer look.
Increase in market share
Target has not released a market share estimate this quarter after noting in late May that it had gained about $ 10 billion in new business since the start of the pandemic. Still, all the signs of continued growth on this core metric were there.
Sales increased 9% in the second quarter, following growth of 23% a year ago. The e-commerce segment contributed to these gains, but the increase in customer traffic was the most important factor. Target processed 13% more transactions this quarter than a year ago. For the context, traffic increased by 3% in 2019 and 5% in 2018.
Target’s 15% spike in traffic in the first half of 2021 suggests that it has achieved an unusually strong retail platform to meet the needs of today’s consumers. “We have spent years building and investing in the sustainable model we have today,” Cornell said in a press release, “which is backed by a differentiated strategy and the best team in retail.”
Target’s profitability also continued to drift away from its peers. As spending increased, the chain benefited from higher prices and a shift in demand towards premium products and less reliance on promotions.
Overall, the operating margin remained at 10% of sales, i.e. approximately double Walmart‘s (NYSE: WMT) rate. These results “reinforce[ed] Target’s leadership position in retail, ”said Cornell. Operating profit jumped to $ 2.5 billion, from $ 2.3 billion a year ago, and exceeded the expectations of most investors.
A fresh look
Target is still busy spending money on a long list of growth initiatives, which primarily involve building a multi-channel infrastructure around its store base that can accommodate all the additional volume it has gained since early 2020. The near-term outlook is bright, with comps likely to rise into single high digits over the next two quarters.
Profitability will drop during this period, according to management, due to higher expenses and higher transportation expenses and wages. But the full-year margin rate is still expected to be above 8%, which is 2 percentage points more than Target had managed before the pandemic hit.
Meanwhile, sales gains in attractive consumer niches like clothing, toys and home furnishings have prompted executives to expand Target’s presence and capitalize on its momentum as a trusted multi-channel retailer. “Even after unprecedented growth over the past two years,” said Cornell, “we see a lot more opportunity to come.”
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