This Is Why You Should Add Target – Target Corporation (NYSE:TGT)

Sales Revenue

Q1 2017

Q2 2017

Q3 2017

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Q4 2018

Q1 2019

15,995

16,410

16,647

22,734

16,556

17,552

17,590

22,734

17,401

Source: Company Earnings Releases

Digital Comparative Sales Growth

Q1 2017

Q2 2017

Q3 2017

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Q4 2018

Q1 2019

21%

32%

24%

29%

28%

41%

49%

31%

42%

Source: Company Earnings Releases

Digital contribution to comps

Q2 2017

Q3 2017

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Q4 2018

Q1 2019

1.1% of 1.3%

0.8% of 0.9%

1.8% of 3.6%

1.1% of 3%

1.6% of 6.5%

1.9% of 5.1%

2.4% of 5.3%

2.1% of 4.8%

84%

88%

50%

37%

25%

37%

45%

44%

Source: Compiled from Earnings Releases

Target (TGT) just posted a strong first-quarter 2019, and it seems like the company is on a firm growth path. Sales have started showing year-over-year growth again, comparable store sales are in the mid-single-digits, digital comps are once again in the +40% range, and digital sales have consistently accounted for +35% of overall comps growth for the past three quarters. So far, so good, but what is the key component that will provide the momentum for sales growth and digital gains moving forward, and why is Target a good portfolio addition at this price?

Internal Indicators

While it’s clear that the omnichannel initiatives like curbside and same-day pickups have yielded results, the move to open more small-format stores is nicely complementing the increases in traffic over the past several quarters. I believe this is the real key to Target’s success, moving forward.

The fourth-quarter 2018 earnings release revealed this nugget of information:

Stores fulfilled nearly three quarters of Target’s fourth-quarter digital sales.”

That trend was once again seen in the first quarter of 2019 when CEO Brian Cornell said that “our stores handled more than 80% of our first quarter digital volume, including all of our same-day options combined with digital orders shipped directly from stores to guests’ homes.”

It’s clear that an expanding store presence, especially the small-format stores with their carefully curated SKUs, is making its presence felt at the top line. Target’s guests also seem to find another of its offerings quite appealing: shop in-store and have it home-delivered at a later time that same day. According to COO John Mulligan:

In dense urban areas, where we’re building small format stores, we offer a service in which guests who shop in-store can ask us to hold their basket at checkout and deliver to their front door later that same day in a time window of their choosing. For this service we charge a flat fee of $7 with no annual fee and our guests love it.

Once we solve the problem of carrying the order home, it frees them up to shop more, a lot more. Average basket size on these orders is more than five times bigger than the average for these locations, and they include a very strong mix of items from our Home category.”

Target seems to have found the sweet spot when it comes to shopper preference. The recipe for a successful e-commerce business in today’s unforgiving market must necessarily contain the convenience factor coupled with the leveraging of a vast physical presence, and Target is busy cooking up a storm with those ingredients. That appears to be the key to its success, and more small-format stores can only add to the flavor. The smaller format also allows Target to expand its markets within the US, touching high-density metro areas in New York, Washington D.C., and California and driving additional traffic. We’ve already seen that from the steady growth in traffic over the past few quarters.

This past quarter the company has already opened seven of the 16 stores slated for launch in 2019 and plans to open another 18 stores in 2020. The bulk of these is of the smaller format at under 40,000 square feet each. Larger stores are also in the works, but only two of them will be over 100,000 square feet, which is closer to its typical supermarket format.

Considering the delivery footprint and customized offering expansion that Target has already executed with the acquisition of Shipt and other initiatives like the $45 box of essentials and at-store delivery, expanding its small-store format is key to sustained growth over the next few quarters. If the company successfully executes its plans for new store openings over the next two years, it will further boost the hybrid shopping experience that the company has been crafting. That equates to healthier digital comps, more traffic, strong overall comps, and continued expansion at the top line.

Macro-level Indicators

Along with Walmart (WMT), Target is one of only a few large retailers showing meaningful growth on the back of overall e-commerce growth in the United States. Kroger (NYSE:KR), for example, isn’t yet reaping the top-line fruits of the digital seeds it’s sown over the past two years, which is something I noted in my recent article titled Hold Kroger for Now. Target, on the other hand, is already seeing the top-line effects of its digital and delivery initiatives in addition to a healthy +35% digital comps growth.

The overall market is shifting from in-store to online, but it’s not going to happen overnight. Meanwhile, retailers like Walmart and Target are leveraging their massive physical store presences to expand their delivery and pickup reach, aided by the shift to e-commerce. Brick-and-mortar retail is resilient in the face of this onslaught but is giving way to a gradual conversion to the way shopping happens. An eMarketer report called The Future of Retail 2019 highlights this trend:

Source: eMarketer

If you read into that table, you’ll see that in-store shopping is not suddenly going to give way to online commerce. Mobile is a strong driver for e-commerce growth, no doubt, but stronger than that is the average consumer’s need for that in-store experience, even if it only means picking up what you ordered online. Here’s a powerful statistic to back that up:

More than 70% of consumers would prefer to shop a brick & mortar Amazon store versus Amazon.com.”

Admittedly, that data nugget comes from a relatively small survey with a sample size of 1,000 shoppers conducted by TimeTrade, an online appointment scheduling service provider. However, it does help explain in a small way why eMarketer thinks brick-and-mortar is a resilient segment. Another report from Vista Retail Support shows that 81% of consumers in a survey said that the in-store experience was “vital to the shopping experience.” Another report from First Insight shows that people tend to spend more in-store than online, and it isn’t the first to say so.

What all these survey results imply is that people want the convenience of online shopping, but they need a touch of that in-store experience as well. And that’s exactly what retailers like Walmart and Target are cashing in on. By offering numerous channels for purchase, delivery and pick-ups, they’re pandering to all types of shopper preferences.

Investors’ Angle

What does this all mean for an investor looking to add TGT to their portfolio? It means that Target is on the right path to sustainable growth. Its digital and delivery expansion initiatives are already showing results, and further store expansion will only help solidify that.

ChartData by YCharts

Target is clearly trading at a more reasonable earnings multiple than either of its big-box peers; and, considering the case I’ve built regarding the company’s actions versus results, I would say TGT will make a nice addition to your portfolio right now.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.