As opposed to other retail and department stock earnings disasters this quarter, Target has surprised everyone with an impressive quarter and sent the stock soaring by almost 20 percent.
Let’s look at the numbers and see what got investors so excited.
Same-Store Sales Are Killing It
The primary metric investors should focus on when it comes to retail is same-store sales. That indicates whether a company is increasing foot traffic and/or has pricing power.
Negative same-store sales are a terrible sign that a company is in trouble, as it means either fewer shoppers are coming into the store or the store no longer has pricing power – or both.
With a relatively mature operation like Target, one would expect same-sale stores between zero percent and 2 percent. I would classify anything between 2 percent and 5 percent same-store sales to be robust. Anything over 5 percent would be astonishing.
Target delivered comparable store sales of 3.4 percent, driven by 2.4 percent in traffic growth and 1 percent increase in prices. Target pointed out that comparable-store sales have grown 10 percent over the last two years, which is the best performance in more than a decade.
This particular metric cannot be understated. In a period where every other retailer, with a few exceptions, has been struggling with same-store sales increases, Target has bucked the trend.
Good Macroeconomic Metrics Are Juicing Target’s Sales
I think this trend is the result of several things, not all of which are attributable to Target.
Target has certainly been helped by strong consumer confidence, low unemployment, and growing wages.
I give a lot of credit to management, who have been aggressively reinventing the Target brand. The ability to drive up and pick up items that have been ordered online makes a measurable difference to people who are in a hurry and don’t have the time to wait even two days for an Amazon Prime delivery.
Target has also been juicing up its private brand sales, has done a very nice job in remodeling many of its stores, and its loyalty program has also provided support.
The Drive-Up Model Is the Future
Management pointed out that almost 8 percent of Target shoppers used the drive-up service during the quarter, and that number is increasing. The idea of curbside delivery was instituted by some of the fast-casual restaurant chains in recent years. Extending that idea to brick-and-mortar retail is a natural next step.
Ed Butowsky, Managing Partner at Chapwood Capital Investment Management, tells CCN.com:
“I suspect you’re going to see a substantial increase in [the] consumer’s use of this service. Amazon may have great prices, and two-day delivery for Prime is fantastic. Yet there are plenty of items that people need immediately or in the very short term, and that convenience is going to be worth paying for.”
I wouldn’t be surprised if Target started opening small distribution centers much in the way that Amazon has done in order to compete.
This strategy led to a 3.6 percent increase in total revenue and a whopping 17 percent increase in operating income to $1.32 billion. Continuing operations soared 19 percent to $1.22 billion, while net income grew 17 percent to $938 million.
It may be hard to believe, but Target’s annual revenue is almost $76 billion. Yet Target stock trades at 0.65x sales. It should be trading closer to 1x sales, or $140 per share.