In the minds of some top Wall Street analysts, Target is a retail fairy tale: Strong in-store sales, surging online volumes, earnings day blowouts and a skyrocketing stock price.
Target, somehow — someway — has managed to bring this dream sequence to life in a big way this year. Despite a dizzying series of investments in stores, people, process and product over the past three years, profit margins have magically sprung to life.
So has Target’s (TGT) share price. The Minneapolis company’s stock has surged 88% year-to-date, dusting the S&P 500’s meager 24% ascent and even its major rivals Walmart (WMT) and Amazon (AMZN), which have seen their stock prices rise 27% and 14%, respectively, on the year.
For those reasons, Tar-jay, as it’s still affectionately known by loyal patrons of its cheap-chic merch, is the Yahoo Finance Company of the Year for 2019.
“Obviously, there were some doubters out there a few years back,” Target CEO Brian Cornell tells Yahoo Finance. “But to see people put Target back in the winner’s circle, this iconic American retail brand, I take a lot of pride in the work the team's done. And it's certainly gratifying to see the progress that we've made.”
Let’s not forget the shark-infested waters Target swims in, imperiling shareholder dreams. Amazon’s real-time price slashing and its monster sales machine, Prime, are around-the-clock concerns. Retail executives won’t concede Amazon fears on the record, but they acknowledge Jeff Bezos & Co. are a real concern. And over in Bentonville, Arkansas, Walmart is forever thinking of ways to cut pennies off food prices and deliver merchandise in new, faster ways. That’s Walmart being Walmart.
What these two formidable institutions do each day to win shoppers — not counting the gazillions of other retailers out there hawking coupons on food and jeans — makes it incredibly hard for a discounter like Target to rise above each quarter with strong earnings and blow the minds of a Wall Street community that’s rarely happy.
“You want to always be careful crowning anyone,” says Deutsche Bank’s veteran retail analyst Paul Trussell. “But certainly right now we are seeing Target do all the things that retailers would like to have work for them.”
Planting the seeds
To understand Target’s meteoric 2019, one has to go back a bit — to one day, in particular.
The date was February 28, 2017. Target had rented out a sleek banquet hall in New York City and invited the Wall Street community (and media such as yours truly) to attend. It would be there where Cornell would finally reveal his vision for the Target of the future. Wall Street was hungry for details and Cornell primed and ready to deliver his third and long play.
To say the tension in the room was palpable would be an understatement. Target, like many others in retail, was closing the books on a tough holiday shopping season that ended two months earlier. Target’s fourth quarter comparable sales fell 1.5%, store traffic rose a slim 0.2% and earnings came in at the low end of guidance. Those numbers hit the newswires early the morning of the 28th. The stock had already dropped 29% during the last 12 months, and it might be about to get worse.
Cornell had been CEO for three years, and the heat was building to deliver a sustainable turnaround. Every analyst in the room knew it.
As the analysts were digesting the sluggish earnings release, Cornell strode to the stage for a scheduled presentation in his trademark black suit. He had some startling news: Target would spend a whopping $7 billion over the next three years to master digital shopping and woo picky millennials with growing families.
The plan was ambitious: More than 1,000 store remodels by the end of 2020. The opening of 30 small stores a year in urban areas dominated by CVS and Walgreens. The retraining of employees and a new staffing model for shipping online orders from the stores. An overhauled website, mobile app and rewards program. Lower prices on groceries and consumables.
“It's one of those moments you always remember,” Cornell told Yahoo Finance. “When we first pushed the button, the reaction wasn't great. And we knew people were going to question investing in stores.”
That $7 billion price tag was a tough sell. I was there, canvassing the room, when Cornell revealed the number. Analysts looked at each other with stunned faces. A feeling of shock swept the room.
“I am surprised like everyone else,” Trussell said to me at the time.
What that $7 billion investment meant to Wall Street at the time was depressed profits and cash flow. Sales would suffer as construction crews remodeled stores. Wall Street hates financial disruptions, especially in retail. There was just no belief Target would earn a solid return on an investment that large requiring so many fundamental changes, especially with a rejuvenated Walmart and a growing nation of dollar stores.
Target’s stock closed the Feb. 28, 2017 session down about 12%. Wall Street’s verdict on Cornell’s plan was two thumbs down.
The CEO stands by his decision.
“I stood up on that stage representing over 300,000 team members and shareholders knowing that this was not just the right thing for the next year or two years or five years,” Cornell recalls. “It was the right thing for the next 30 years to make sure this iconic brand has a place in the retail landscape for years to come.”
In one final sign Cornell wasn’t playing around, he purchased same-day delivery service Shipt for $550 million on Dec. 13, 2017. Many in retail had never even heard of Shipt at the time. The price seemed astronomical. So ended a year of question marks for Target, and Cornell.
Target flips on the light switch
Things improved in 2018. In the third quarter, comparable sales rose a hefty 5.1%. Online sales spiked 49%. Earnings per share gained 20.2%. Still, by the end of December, Target’s stock was down about 3% for the year. Wall Street simply didn’t believe the retailer’s turnaround story. Its improved results probably weren’t sustainable. Slick-looking new stores wouldn’t be enough.
Fast-forward to March 5, 2019. Earnings day for the crucial holiday quarter, and the whole year. The moment of truth.
The numbers soared. Comparable sales increased 5.3%. Online sales improved 31%. Target’s stores fulfilled 75% of its digital orders, underscoring success in overhauling operations by Cornell’s highly regarded number two executive and COO John Mulligan.
For the full year 2018, Target’s earnings per share hit a new all-time high.
After explaining the results, Cornell outlined 2019 guidance: Comparable store sales growth of low- to mid-single digits, EPS growth of up to 20%. But after the impressive quarter Target had just put up, once-skeptical analysts thought Cornell was low-balling. Several told me at the time Cornell’s outlook would likely prove very conservative. They were at long last willing to bet on the Target turnaround. I heard the enthusiasm in their voices.
Target’s closing stock price on the day of those fourth quarter earnings: $75.81. Target’s closing stock price by tax day on April 15: $83.26.
Off to the races.
Since the spring of this year, Target’s earnings release days have only gotten that much better and so has its stock price. Apparel sales boomed 10% in the third quarter, despite the challenge of unusually warm fall weather. Online sales increased 31%. Same-day fulfillment sales accounted for 80% of Target’s digital sales.
Operating income rose 22.3%.
The company lifted its full-year earnings outlook for the second time this year. Entering the fourth quarter, Target took its full-year earnings outlook to $6.25 to $6.45 a share from $5.90 to $6.20 a share. That was the clearest sign to investors that Cornell’s $7 billion in investments outlined back on Feb. 28, 2017 are working.
“What has been most impressive — and where we have been positively surprised — is just on how strong they have grown their EBITDA [operating profits],” Trussell says. “Margins have been phenomenal this year. Even when you write all of these initiatives down, that would rarely translate into double-digit growth in operating income let alone the 20%-plus we saw in the third quarter. So that is the biggest positive surprise.”
On Wall Street, the mood on Target is quite different versus two years ago.
Shipt, the little-known 2017 acquisition, is now integral to Target’s performance. Shipt’s same-day delivery covers 65,000 items that are filled from 1,500 Target stores spanning 47 states. The service is helping Target outflank Amazon (which has no stores other than Whole Foods) and apply big-time pressure on Walmart.
“We think same day is incredibly important,” COO Mulligan says. “Consumers have a lot on their plate. We think about same day, two day, whatever day — it is about getting the consumer what they want, when they want it, how they want it. And that type of flexibility we think is table stakes.”
Wall Street agrees.
“A lot of the talk out there is about them competing with Amazon on next-day delivery,” says Bank of America Merrill Lynch retail analyst Robby Ohmes. “They are killing it on same-day delivery because Shipt is so successful. The fact more people are taking up digital shopping and using their pickup services, that is driving traffic to the stores and same-store sales.”
Target’s parking lot pickup service — where groceries are brought out by an employee and put into an idling car — is now available in 1,500-plus stores. That’s yet another byproduct of Cornell’s $7 billion check and Mulligan’s tinkering with the store-labor model. Mulligan says sales via the service are growing by 500%.
Grocery departments are larger and actually sell steak and fish — no need to visit a Safeway or Kroger anymore. Expect more grab-and-go refrigerated products in 2020, notes Mulligan. Beauty departments look more like Sephora than CVS, indeed a good thing. Cornell thinks Target’s revamped beauty department is stealing market share from beat-up department stores and specialty players.
All told, Target’s journey through its fairy-tale 2019 has been peppered with headline-grabbing moments outside of blowout earnings. Some highlights:
Inks expanded distribution deal for Levi's jeans in August.
Signs deal in August to open 25 Disney toy shops this year. 40 more coming in 2020.
Reboots private label food brand. Good & Gather hits stores in September with 650 items and 2,000 more coming in 2020.
New 'Target Circle' loyalty program launches in September. Already has 35 million members.
Partners with new Toys 'R Us team in October to help relaunch bankrupt toy brand online.
Target says in October it will spend $50 million more on holiday payroll this year versus 2018.
Target’s stock price hit a record closing high of $127.65 on Nov. 21. Year-to-date the stock price is up 88%, by far one of the best showings in retail and the broader market. Keep in mind here that Target is a large-cap retailer — it’s not the norm to see a large-cap of any ilk notch an almost 100% increase in its stock price in a year. Take a look at Macy’s stock, which has crashed 51% and Kohl’s, which shed 32% in the value of its stock, this year.
Explains Ohmes, “I think they are executing better than anyone else on the omni-channel strategy. I don’t know of any other retailer executing omni-channel retail as well as Target. They have a lot of space in those stores. The space is less productive than Walmart. They don’t have a big grocery business getting in their way. They had a fantastic sourcing model going into this [turnaround]. So they leveraged all their assets and have done all the work so they are crushing it.”
Not too shabby for a company that only two years ago couldn’t get any love on Wall Street.
The next chapter
The unfolding dream for Target is unlikely to end in 2020, experts tell Yahoo Finance. Target should enter 2020 with considerable sales momentum across its stores and online businesses. From a fundamental perspective, the Target of today is quite different than the one 30, 60, 90, 120, 365 or 720 days ago.
It’s faster on servicing orders. A successful same-day delivery service rollout has lowered expensive last-mile delivery costs, supporting profit margins in turn. The stores are the destination for the latest trends in apparel as opposed to department stores. Target has morphed into the toy capital of America thanks to its Toys ‘R’ Us and Disney shop deals. One could finally check off an entire grocery shopping list at Target, too.
Heck, Target may even be nearing a deal to bring a large name-brand athletic-wear brand into its stores at long last. Media has speculated it could be Nike, though sources tell me that would be surprising. Cornell won’t say.
One risk to Target’s performance in 2020, though, is the U.S. economy.
“Target certainly has macro risk,” Trussell says. That will be some of the investor risk on Target. Relative to Walmart, Dollar General, or Costco, Target is a bit more discretionary in nature with their category mix. They have far less penetration on the food side. So those true essential consumables won’t necessarily hold Target up if we get to a point in time where the consumer is more pinched or heading into an election year and we get some CNN Effect.”
Judging by the November jobs report, the U.S. consumer is just fine and will stay that way in 2020. That means more visits to Target stores.
Other than that, the execution machine that has become Target 2.0 is hungry for more quarterly wins and stock price records. For Cornell, it has been a long overdue “thank you” from Wall Street. Just don’t expect Cornell — a seasoned, measured executive — to get complacent by reading his digital press clippings each day. Cornell is fully aware that success in retail is earned every second of every day.
“I think part of our culture is being very humble and making sure that we stay hungry,” Cornell says. “That we know each and every day, we have a guest to serve, and a business plan that we have to execute. So we stay very grounded. We know that in retail, we get a scorecard every day. And we want to make sure it's a winning scorecard each and every day of the week.”