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Pandemic Boosts Target’s Growth, at Rivals’ Expense

Target grabbed more than its share of pandemic sales.
(Jonathan Weiss)
(Jonathan Weiss)
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Target posted a robust quarter that featured notable expansion amid the Covid-19 pandemic, WSJ reports.

Why It Matters: Target’s success in the latest quarter caps off a year where it “increased revenue by more than it had in the previous 11 years combined.” The retailer has taken steps to build a “durable, scalable and sustainable business model” and has seemingly done so by ramping up its investments in online services.

  • Target uses stores as hubs to ship online orders or pick up from the parking lot, as opposed to sinking capital into establishing “a massive network of online fulfillment warehouses.”
  • Roughly 95% of sales in the past year came from store fulfillment.

Numbers To Consider:

  1. Full-year revenue reached $93.6 billion, a 20% spike from the year before.
  2. Comparable sales, “those from stores and digital channels operating for at least 12 months,” increased by 20.5% in the quarter ending January 30.
  3. With high-demand products such as home décor, food and toilet paper, and staying open through the early phases of lockdown, Target estimates it grabbed roughly $9 billion in sales from competitors.
  4. Target’s net earnings landed at $1.38 billion, rising by 66% from the year-ago period.

Meanwhile, retailers are reporting mixed results. Best Buy and Home Depot posted notable revenue increases, while Macy’s fell drastically.

  • “Some retailers say Covid-19-style buying trends will persist longer term, while other industry executives say shoppers will return to more normalized buying patterns later this year, as more people are vaccinated and return to spending on dining out or travel.”

The Takeaway: Covid-19 is still highly unpredictable, making the outlook of any business unclear. For that reason, Target, like many other companies, did not share financial guidance for the current year.

Justin Oh:

Target ($TGT) is a highly defensible business that has benefited from the pandemic, but is also very strong outside of a pandemic as well. Investors have bid the stock up as a relative safe haven in these markets.

But we’ve chosen to forgo Target ($TGT) on the Big Board in favor of other higher returners because $TGT has carried a quality premium for the past six months. 

My issue with Target is that it doesn’t offer transformational upside on earnings and in fact has a possible post-pandemic slow down in the future. Despite this, at $181 per share, $TGT is trading at 30-40% higher valuations now than in 2018-2019 (11.5x EBITDA and 4% Free Cash Flow Yield now vs 8x EBITDA and 7% Free Cash Flow yield in 2019).

Walmart ($WMT) looks more interesting to me, which at $132 per share has come down to normalized historical valuations of 12x EBITDA and has the small potential upside of Walmart+.

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