Target: model student | Financial Times

Target may have to stand in the shadow of larger rival Walmart. But it is no kiddie on the rough retail playing field. Minnesota-based Target — known for its devoted customers — offers a model for running a brick-and-mortar business in the Age of Amazon. 

Target had a monster year, partly due to the pandemic, and in spite of it. Top-line rose a fifth to $92.4bn. Net income jumped by a third. Both rates trounced those at Walmart, where annual sales gained in single digits while net profit fell.

Walmart, with six times greater annual sales, is a much bigger company, and mustering high annual expansion rates is harder. But Target’s outperformance stands out. A $15bn sales gain last year exceeds the retailer’s total growth in the 11 previous years combined. It is the direct result of the turnround plan boss Brian Cornell put in place four years ago.

That $7bn investment plan called for revamping its stores and supply chains, creating dozens of new private-label brands and improving its ecommerce offering.

Cornell’s strategy relies on Target’s network of 1,900 physical stores as mini-fulfilment centres, enabling kerbside pick-up and same-day delivery. These services kept customers coming during the pandemic, so that Target could pick up market share last year.

Shares in Target have risen 65 per cent over the past 12 months and briefly hitting a record high in January. Even so, at 21 times forward earnings the stock offers relative value to Walmart’s 24 times. Better, Target squeezes more from its capital base than its rival, boosted by its private-label brands. Target’s return on equity of 30 per cent nearly doubles that of its rival.

Going forward, two things will differentiate Target from Walmart: the strength of its in-store brands and a more affluent customer base. Higher margin in-house lines not only pad profits, they also act as a bulwark against Amazon’s reach. As the shake-out continues in US retail, investors can bet Target will remain tops in the playground.

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