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Target's Winning Strategy

GuruFocus.com
·3 min read

- By Panos Mourdoukoutas

Target Corp. (NYSE:TGT) is a big winner of the new, online-focused retail landscape, as evidenced by a streak of strong earnings and revenue reports.

On Wednesday, Target reported fiscal third-quarter earnings and revenue that crushed Wall Street's expectations, confirming that the retailer can thrive in good and bad times.

Target's success can be attributed to a "digital-first" approach to retailing, according to Drew Kraemer, CEO of Code3, a performance marketing agency:



"Target continues to be a key player in retail that's shaping the future of the customer experience... Since the onset of the pandemic, businesses have faced several challenges, as millions of shoppers rely more on e-commerce for everyday essentials. Target has gained a leg up on its competitors by adopting a digital-first business approach early on that meets evolving consumer expectations while providing them a differentiator in the market."



Meanwhile, together with Walmart (NYSE:WMT) and Amazon (NASDAQ:AMZN), Target has changed the retail game, according to Stanley Philipose, author of the book "Retail Apocalypse; The Death of Malls, Retailers and Jobs." They have merged online and offline sales, speeding up the delivery time.

Target

Walmart

Amazon

3-year Revenue Growth (%)

7.9

5.4

25.6

3-year EBITDA Growth (%)

4.2

3.6

42.2

Current Operating Margin (%)

5.87

3.93

5.72

Average Annual Total Return (2010-20)

14.63

13.71

34.75

Market Price

$169.56

$150.4

$3,142.4

Intrinsic Value

$103.67

$115.41

$2,835.4



Company

ROIC

WACC

ROIC-WACC (Economic profit)

Target

12.59%

6.12%

6.47%

Walmart

8.73%

3.39%

5.34%

Amazon

11.37%

9.48%

1.89%



Same-day shipping has also emerged as a hot new trend in the wake of the Covid-19 lockdowns. According to a survey conducted by OpenX and Harris Poll in July, 82% of U.S. consumers have ordered goods online to pick up in-store or curbside since the pandemic started.

"By promoting Same Day Shipping with Shipt, free two-day delivery, along with improving their curbside and in-store pickup, Target enables its customers to safely engage with its brand while providing flexibility to meet the needs of each consumer," Kraemer said. "We'll continue to see Target pave the way for other brands through its unique digital strategy now and into 2021."

Zolidis agrees that as retailers look toward 2021 and a post-vaccine environment, there will be "questions about which companies will hold onto customers and profitability gained during the crisis."

"This is where Target stands out, in our opinion. Its results have a feeling of durability," he wrote. "The company is gaining traffic, taking share from both defunct and persisting competition, benefiting from trip consolidation, and deepening its relationship with the consumer."

Zolidis remains bullish on Target, seeing shares reaching $200 in 2021. He arrived at this figure by forecasting $9 to $10 in earnings per share and free cash flow over the next three years and applying a price-earnings multiple of 20.

While it's always uncertain where a stock will be in the future, one thing is clear: Target has a winning strategy to ride the next wave of retailing, the merging of online sales with traditional brick-and-mortar sales.

Disclosure: I own shares of Target and Amazon.

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This article first appeared on GuruFocus.