Target Tells Investors It Is Getting Higher Returns From Its Remodeling Spending

Target (NYSE: TGT) gave investors plenty of good news to pore over in its recent third-quarter earnings report. Sales and profits both blew past management’s expectations, and the key drivers behind the outperformance suggest that momentum could continue through the holiday season and into fiscal 2020.

Following the earnings announcement, CEO Brian Cornell and his team held a conference call during which they outlined the reasons for the retailer’s strengthening operating trends. Let’s look at some highlights from that presentation.

Image source: Getty Images.

Winning more share

We’re happy to see continued broad market share gains across many of our core merchandising categories.
— Cornell

Drilling down into Target’s 4.5% growth rate shows just how strong the gains were when compared to peers like Walmart, which recently grew comps by 3.2%, and Kroger, which is expanding at a 2% rate. The chain saw what management called “dramatic” growth in apparel market share, including jewelry and shoes, and notched wins in beauty and cosmetics, groceries, and household essentials and cleaning products.

The broad growth was reflected by an overall 3% increase in customer traffic. “Guests chose to shop with us more often both in stores and through digital options,” Cornell explained.

E-commerce is driving comps

Digital comps grew 31% and drove 1.7 percentage points of the company’s [4.5%] comp growth.
— Cornell

Target’s e-commerce channel was a massive contributor to growth, as sales rose 31% for the quarter. On top of last year’s 49% spike, the compounded boost means that digital revenue has roughly doubled in the past two years. “The growth rate of all three of these [same-day] services in 2019 has been nothing short of remarkable,” COO John Mulligan said.

Just as important is the fact that Target’s same-day fulfillment options are accounting for a bigger and bigger portion of this growth. Since these sales are far more profitable than traditional e-commerce sales, that shift contributed to a surprising jump in gross and net profitability in the third quarter.

Capital spending

We continue to see remodel sales lifts in line with our assumptions, and we’ve seen a meaningful second-year lift that wasn’t originally part of our modeling for these projects.
— Mulligan

Target has been pouring cash into its stores, in part by retrofitting them to double as e-commerce distribution centers, but also to improve the in-store shopping experience. Roughly 300 locations have received these upgrades so far in 2019 and the results have been better than executives predicted. That success has given them the confidence to keep up their accelerated remodeling pace through 2020 before slowing down the capital spending rate starting in 2021. Still, management is finding more efficiencies in this program and so they now believe capital spending will land at around $3.1 billion this year compared to the original plan of $3.5 billion.

A good position to be in

We feel very good about both the level and make up of our inventory, which should position us to extend the strong sales and earnings performance we’ve seen so far this year.
— CFO Michael Fiddelke

Target’s long-term operating model calls for a low-single-digit sales increase each year along with a mid-single-digit boost in operating income. The company’s latest results put it on track to materially outperform that goal in 2019. Investors will know for sure about the sales side of that performance when Target releases its post-holiday update in mid-January. But as of a week before Black Friday, the retailer’s growth trends are about as strong as shareholders could have hoped heading into the holidays.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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