Five reasons why Target's sales growth may be more than a pandemic-related blip

Published Wed, Nov 18 20203:19 PM ESTUpdated Wed, Nov 18 20206:04 PM EST

Melissa Repko @in/melissa-repko @melissa_repko

Key Points

Investors and analysts are trying to figure out if retailers that have shown strength during the pandemic have formed lasting customer habits or if their performance is just a blip.
On an earnings call, Target CEO Brian Cornell laid out a long-term vision for the company that extends beyond the pandemic, but capitalizes on its recent gains.
Target CFO Michael Fiddelke said the company has strengthened its relationship with customers during a pivotal time. "We have long known that engagement with guests at a time when their habits are changing is an incredibly important factor in deepening long-term loyalty," he said.

Target delivered another strong quarter on Wednesday and easily surged past analysts' expectations. That hasn't kept investors from asking whether the retailer's sharp growth curve may end when the coronavirus pandemic does. This week, in particular, investors and analysts have sorted through a complex set of factors — particularly for the retail industry. Across the U.S., coronavirus cases and hospitalizations are rising rapidly . Shoppers in some regions are stocking up on staples like toilet paper again. The all-important holiday season is off to an early start. And progress toward a Covid-19 vaccine has raised hope about the end of the global health crisis and questions about what life will look like after it. That's created confusion and skepticism among industry watchers who are trying to figure out if retailers that have shown strength during the pandemic — such as Target, Walmart and Home Depot — have formed lasting customer habits or if their performance is just a pandemic-related blip. Investors had a tepid reaction to the company's results at first. Target shares rose only slightly in the morning. Later, the stock gained momentum and touched a 52-week high of $172.12 in trading. The shares recently were up 4.5%, bringing its market value to $85.3 billion. During an earnings call, Target executives including CEO Brian Cornell laid out a long-term vision for the company that extends beyond the pandemic, but capitalizes on its recent gains. Year to date, he said the company has won $6 billion in market share by adding unique merchandise, offering convenient e-commerce options and pushing into new markets like dense urban neighborhoods with its small-format stores. Target Chief Financial Officer Michael Fiddelke said the company has strengthened its relationship with customers during a pivotal period. "We have long known that engagement with guests at a time when their habits are changing is an incredibly important factor in deepening long-term loyalty," he said. "It's the reason we prioritize the back-to-college season when many consumers are moving away from home for the first time. It's also the reason we're there for young couples when they get married and when they have children because our relationship with young families has long been a foundational aspect of our strategy." Here is a closer look at why Target executives say this year's sales growth and market share gains will endure. 'One-stop solution' During the pandemic, Target has played up its edge over some competitors: Having a wide variety of items that customers want or need. The discount retailer's merchandise cuts across categories from gallons of milk and bunches of bananas found at the grocery store to a cute pair of sunglasses or a sweater that a customer might otherwise find at the mall. Instead of driving to the shopping mall or making multiple trips to different stores, Cornell said consumers can head to Target or go to its website and find it all in one place . He said that caused customers to add more to their baskets in the third quarter. The average ticket grew by 14.6% in the quarter compared with the same period last year. "We're seeing a guest who's shopping all of our categories, taking advantage of our one-stop solution," Cornell said in an interview Wednesday on CNBC's " Squawk Box ." That assortment has resonated as consumers limit shopping trips during the global health crisis. And Target executives bet it will continue to appeal, even in the future when people's calendars fill up with social gatherings, work meetings and in-person obligations again. Strength of brands Inside of its stores and on its website, Target sprinkles unique and often exclusive products aimed at delighting customers, generating foot traffic and inspiring impulse buys. Shoppers can find a mix of brands, from its private labels like children's apparel brand Cat & Jack and food and beverage brand Good & Gather to ones like Levi, which have built-in name-recognition and trust. In its grocery department, for example, Target has launched a line of specialty food items like small-batch Italian sauces and specialty coffees called Good & Gather Signature. It created a line called Hearth & Hand in collaboration with Magnolia, the home and lifestyle brand of Chip and Joanna Gaines, that features stylish mirrors, throw pillows and seasonal decor. And it has collaborated with established brands to create excitement. This holiday season, for example, it teamed up with famous toy store FAO Schwarz on an exclusive 70-piece toy collection that will be available at Target stores, online and at the FAO Schwarz store in New York City. Next year, it will add another feature to coax shoppers in and encourage them to buy more: A smaller version of an Ulta Beauty shop that will be in hundreds of its stores. Cornell said that company leaders carefully pick products that will catch consumers' eyes and cause them to take out their wallets. "We'll always be curators and find the right mix for our guests between our own brands and iconic national brands," he said. E-commerce made easier Even before Americans switched to a life that revolved around home, they were shopping more online and having purchases dropped on the doorstep. Target added new options to make e-commerce easier and faster. Instead of waiting for a package, customers could get their online purchase the same day. Those same-day services have taken off during the pandemic and that was reflected in the third quarter : Its curbside pickup service, Drive Up, shot up more than 500%. Target's home delivery service Shipt grew nearly 280%. And Order Pickup, an in-store option that allows customers to retrieve online purchases in person, climbed more than 50%. That focus on simplifying shopping is also why Target is adding fresh and frozen foods and adult beverages to curbside pickup at more of its stores — an addition that may appeal to parents with little time to spare and a few kids in the backseat. Driving up online profits Behind the scenes, Target has made progress toward cracking a code that nearly every retailer is focused on: How to make online purchases more profitable. For decades, retailers have relied on customers to do some of the work by having them pick out their own clothing, groceries or other items and take them home. With the rise of online shopping — particularly during the pandemic — retailers are under pressure to fulfill orders while keeping labor and shipping costs low. The discounter, however, has a different approach than some retailers. Three years ago, it said it planned to use its stores as hubs for online fulfillment instead of having employees pick products and pack boxes in huge fulfillment centers like Amazon . More than 95% of its third-quarter sales were fulfilled by stores, the company said. Cornell said the company's performance so far this year, including its digital sales growth of nearly $6.5 billion, is "a direct result of our stores as hubs strategy combined with the tireless work of our team to bring it to life." Catering to its core customer Even as many Americans have lost their jobs, gotten furloughed or seen their pay cut during the pandemic, Target's core customer has proven resilient. That may be because their customers include families in suburban areas or cities that have been largely insulated from the recession or feel they have more money to spend as they cancel vacations or can't go out for a fancy dinner. For the past two quarters, company leaders have credited wallet shift as a driving factor as shoppers spend less on everything from gas to movie tickets. Fiddelke said customers have been less price sensitive than usual, and have scooped up more items at full price. That means fewer products wound up on the clearance rack during the third quarter. The company said it's won billions in market share from competitors so far this year, though Cornell declined to call out who was on the losing end of that equation. As Target picks up customers from other stores, including pricier mall staples like Nordstrom and Gap , they may see the price of Target's clothing or decor as a bargain — even at full price — and be willing to trade up to more high-end items that roll out in the months ahead, such as premium beauty products in Ulta Beauty at Target.

Target retail store in San Ramon, California, May 30, 2020.

Getty Images

This week, in particular, investors and analysts have sorted through a complex set of factors — particularly for the retail industry. Across the U.S., coronavirus cases and hospitalizations are rising rapidly. Shoppers in some regions are stocking up on staples like toilet paper again. The all-important holiday season is off to an early start. And progress toward a Covid-19 vaccine has raised hope about the end of the global health crisis and questions about what life will look like after it.

That's created confusion and skepticism among industry watchers who are trying to figure out if retailers that have shown strength during the pandemic — such as Target, Walmart and Home Depot — have formed lasting customer habits or if their performance is just a pandemic-related blip.