How Target Captured $10 Billion of Market Share in 1 Year | The Motley Fool

Target (NYSE:TGT) calmed shareholders’ worries in this week’s earnings report, with mostly positive answers to concerns about sluggish growth or an approaching end to its incredible market-share run.

Rather than a reversal of that happy trend, the retailer posted another record period of demand as it won more business in booming niches like home furnishings and consumer electronics. Management is now feeling more bullish about 2021, too — especially on the earnings front.

Market share is still rising

It can be hard to evaluate retailers’ growth rates in these boom times. Companies from Walmart (NYSE:WMT) to Home Depot are notching fresh records as consumers spend aggressively on staples and discretionary products.

Image source: Getty Images.

Target’s 23% year-over-year sales spike puts it near the top of the heap, though, compared to Walmart’s 6% Q1 increase. CEO Brian Cornell and his team estimate that a full $1 billion of the chain’s $4.5 billion in additional sales this quarter came from new market share rather than simply holding the same portion of a growing industry niche. Counting the $9 billion in new share the company won in fiscal 2020, Target has claimed $10 billion of new volume since the start of the pandemic.

Executives say the credit all goes to Target’s ability to satisfy customers’ demands for conveniently delivered, high-quality merchandise. “From our unique mix of categories to our unmatched fulfillment options,” Cornell said in a conference call, “our business is delivering what consumers want and need.”

Cashing in on growth

The even better news for the business is that demand is spiking in the most profit-friendly product and service categories such as home furnishings, apparel, and same-day services. That helped push gross profit margin up to 30% from 25% a year ago. Operating income soared to 9.8% of revenue, up from 2.4% a year ago and powering a 200% increase in adjusted earnings.

That’s another way in which Target stands out from peers like Walmart, who are predicting flat or slightly lower profitability in 2021. The retailer’s outsize growth in high-margin areas means it can spend aggressively on its infrastructure while still raising its operating margin.

Looking ahead

Full-year operating margin is expected to again outpace the 7.2% rate Target notched in 2019 before the pandemic. It won’t be as high as last year’s record 10% rate, management warned, but it should hit at least 8%. Walmart’s and Costco‘s comparable figures are near 4%, for context.

And unlike these rivals, Target feels confident predicting robust sales growth both for the second quarter and for the full 2021 fiscal year. Comps should rise by as much as 9%, management said, following last year’s 19% spike.

That’s a recipe for soaring long-term earnings and booming cash returns to investors. A result like that isn’t common in an industry known for tiny profit margins and cutthroat competition. And it’s likely that an economic slowdown would end that impressive run. But Target today is still putting up the type of growth and earnings numbers that investors just aren’t used to seeing in the retailing world.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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