• Target Wins Big Again On E-Commerce, But Its Success Is More Nuanced Than That

  • Target (NYSE:TGT) is growing at its fastest pace in decades. Third-quarter sales were up 21% year over year to $22.6 billion, and operating income jumped by 93% to $1.9 billion. Among the value stocks in my portfolio, Target is outperforming the pack by a wide margin with a 34% share price gain year to date -- and it's up by more than 70% from where I purchased it (again) during the early, intense phase of this spring's economic lockdown.

    Thanks to its e-commerce strategy, I think this big-box store stock has a lot more room to rise.

    Target, a top apparel stock?

    Target said that its online retail segment remained in triple-digit percentage growth mode during the summer and early autumn months, with sales increasing by 155% compared to a year ago. But not all of its recent success can be attributed to digital sales. Only 10.9% of the 20.7% comparable-store sales expansion (or comps, an average of traffic and average ticket size) was attributed to e-commerce. The balance came from Target's physical stores. In a socially distanced and remote world, what drove that surge in traditional retail spending?

    A small grocery cart with a

    Image source: Getty Images.

    That's thanks to Target being the top apparel, accessories, and home goods retailer. As consumers head to their local stores to stock up on basics, they're also increasingly adding clothes and other higher-value household items to their carts. And the trend is no accident. A few years ago, the big-box chain started investing significantly in its own house brands of clothing, baby goods, and home goods merchandise. Then, it added a dash of store-format updating that boosted both the appeal and accessibility of those items. The result has been stellar in-store performance.

    Granted, even some of Target's brick-and-mortar performance can likely be chalked up to effects from the pandemic. (Emergency trip to grab toilet paper, hand sanitizer, and canned food, anyone?) But I'm not inclined to take too much credit away from the retailer. As CEO Brian Cornell explained on the last earnings call, comps on apparel grew nearly 10% compared to a year ago, home decor and style grew in the mid-20% range, and electronics grew by more than 50%. What is so impressive about these metrics is that, overall, sales in these retail categories were shrinking. According to the U.S. Census Bureau, average retail sales for clothing and accessories, home furnishings and decor, and electronics are down 30%, 7%, and 15% respectively through the first 10 months of the year.

    In short, Target has been making huge market share gains at the expense of its competitors -- most notably, department stores. Management estimates the retailer has gained some $6 billion in market share across these categories so far in 2020.

    Not just a store, a one-stop fulfillment center

    The other half of Target's equation for success came from a second series of (at the time, controversial) investments that it embarked on a few years ago. The company has reimagined and revamped how it uses its physical real estate.

    Though Target's digital sales channels now account for low- to mid-teens percentages of its total sales, 75% of those online sales are fulfilled through one of its stores. Talk about an efficient operating model.

    While many traditional retailers have struggled to figure out how to fulfill online orders (and have had to spend heavy on fulfillment centers and related logistics), Target realized early on it already had most of the real estate it would need to get its goods into the hands of shoppers. It simply had to adjust how it used its store space.

    Thus the emergence of a model in which retail locations double as fulfillment centers, sites that can ship or deliver (via Target's Shipt acquisition a few years ago) local orders to those who are staying home, or serve as hubs for scheduled pickups for shoppers who are out and about.

    This gives Target some advantages, not just in the e-commerce race overall, but also in operating leverage as it grows. Within its established brick-and-mortar footprint, adding more digital sales equates to growth that's even more profitable. Thus that 93% year-over-year increase in operating income during Q3. For investors, I think this dynamic makes Target stock one of the best bets on omnichannel retail.

    If you're investing based on the expectation of a rebound for the department store concept, I'd redirect your attention here. With its well-balanced blend of digital and physical shopping, Target is eating many traditional retailers' lunch.

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