Target Posts Double-Digit Profitability; Can It Last?

Investors had high expectations for Target’s (NYSE:TGT) second-quarter earnings report, especially after rival Walmart (NYSE:WMT) reported its own blockbuster growth numbers for the period. The two national retailers have been benefiting from enthusiastic consumer demand for their multichannel selling platforms that allow near-immediate fulfillment on products ranging from groceries to apparel to home electronics.

On Wednesday, Target confirmed that the fiscal second quarter was a period of unusually strong growth, as fiscal stimulus payments supported record sales gains. Management made the case that this spike was about more than just a one-time sales boost, though, as illustrated by the retailer’s improving market share.

A smiling couple with shopping bags in a mall

Image source: Getty Images.

Beating peers

CEO Brian Cornell and his team estimate that Target has won market share over the last six months to the tune of an extra $5 billion added to the sales base. There’s plenty of support for that claim in the Q2 report. The chain managed 5% higher traffic at a time when most peers endured slumping transactions. Walmart saw a 14% traffic decline in its U.S. stores, for example.

Like its bigger rival, Target enjoyed soaring average spending per visit during COVID-19 challenges. It posted faster online sales growth, though, which accounted for 13 percentage points of its total 24% comp gain. Walmart’s e-commerce channel accounted for 6 percentage points of its overall 9% comps increase.

Rising margins

That tilt toward e-commerce growth disproportionately flowed toward Target’s quick fulfillment options like same-day delivery. In addition, many shoppers were feeling flush with cash thanks to federal stimulus payments. These factors combined to push profitability higher even as Target spent more on expenses like labor and store maintenance.

Gross profit margin edged up to 30.9% of sales from 30.6%, and operating income jumped to $2.3 billion, or 10% of sales, from $1.3 billion, or 7.2% of sales, a year ago. “We … generated outstanding profitability in the quarter,” Cornell said in a press release, “even as we made significant investments in pay and benefits for our team.”

Can it last?

Target didn’t issue a forecast for the second half of 2020, choosing instead to stress to investors how highly uncertain the outlook appears over the next few months. Besides the threat of continued COVID-19 outbreaks, there are major questions around the back-to-school shopping season and the potential for additional federal stimulus legislation.

Normally, Cornell and his team would review economic metrics like GDP, unemployment, and wages for signs about consumer strength heading into the holiday season. Those backward-looking metrics are some of the worst on record for the U.S. economy, though, due to the pandemic-related shutdowns in recent months.

Yet Target seems ready to endure even a worst-case scenario of constrained consumer spending, given that operating cash flow has soared to $5.1 billion from $2.8 billion over the last six months.

As for potentially positive growth scenarios — like a quick and sustained economic rebound — investors have some good reasons to expect Target to continue adding to its market-share gains in that environment. Shoppers have demonstrated through the pandemic’s first few phases that Target is a valued outlet for their monthly spending budget, whether that involves consumer staples products or more indulgent purchases like home furnishings and electronics.

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