Target, Amazon and Walmart all wowed investors this earnings
season with blowout numbers.
Americans turned to these essential retailers to get their
needs met during the pandemic, and all three benefited from their strong
e-commerce operations as Americans turned to online shopping to avoid risking
exposure to the virus in stores.
In the battle for the American consumer, Target is often an
afterthought next to Amazon and Walmart. The red-lettered retailer is much
smaller than those two rivals, which dominate the retail landscape, but that
doesn't mean Target is playing second fiddle here.
Target just posted 24.3% comparable sales in its second
quarter, and adjusted earnings per share nearly doubled, to $3.38. The big-box
chain is clearly emerging as a pandemic-era winner, and one big reason why is
that it's well ahead of both Amazon and Walmart in profitability.
Compared to Amazon's North American e-commerce segment and
Walmart's U.S. business, Target,which only operates stores in the U.S., has a
much wider operating margin. In the second quarter, Target posted an operating
margin of 9.6%, meaning it kept 9.6% of its revenue before interest and taxes.
By comparison, Walmart's U.S. operating margin was just 5.5% in the quarter,
while Amazon's was even lower at just 3.9%.
Profitability is one of the best measurements of a
business's strength, and Target's ability to convert its sales into significantly
higher profits in the recent quarter is a sign of the retailer's execution.
Here's how the company is doing it.
A diversified product selection
Americans turn to all three of these retailers when they
need anything from eggs to a bicycle to a new set of pans, but the breakdown in
sales differs between each retailer.
Walmart derives more than half of its sales from groceries,
making it the country's largest grocer, but that category tends to be
lower-margin than other segments. As a predominantly online retailer, Amazon
sells far more individual stock keeping units (SKUs) than its competitors, but
the company's strongest category is electronics. It often uses its website to
promote its own products like Echo speakers, Kindle e-readers or Fire TV
sticks, which it tends to sell at or near cost in order to drive media consumption.
As an e-commerce company, Amazon also has to spend heavily on things like
shipping and returns.
A Target storefront.
Target, on the other hand, operates in five business
segments – food and beverage, beauty and household essentials, hardlines such
as electronics and toys, apparel and accessories, and home furnishings and
decor – with sales roughly evenly divided among the five. Target's
"style" categories like apparel and home tend to generate higher
margins than groceries, but the combination of those businesses gives Target a
unique strength. Groceries drive frequent visits, and spur purchases for
higher-margin discretionary items in areas like apparel. This strategy paid off
in the second quarter, as Target's apparel comparable sales rose by double
digits even as sales at clothing stores fell by 36% in that period, according
to the Census Bureau.
Target and Walmart have distanced themselves from other
brick-and-mortar retailers by establishing strong e-commerce businesses, and
its stores play a significant role in its online fulfillment.
Walmart, however, has led with grocery in its e-commerce
business, opening more than 3,000 online grocery pickup locations, but it's
even harder to generate a profit in that category with the extra labor required
for online pickup. Walmart's U.S. e-commerce CEO Marc Lore has essentially
called online groceries a loss leader for the company. Walmart has also
struggled in other areas. Acquisitions of digitally native brands like Bonobos
haven't panned out as hoped, and it shut down both Jet.com and Jetblack, the
experimental concierge service.
Target, on the other hand, has built its e-commerce business
around a wider range of products and only recently made fresh and frozen
grocery items available for pickup. It also uses stores to fulfill a large
percentage of its orders, something Amazon can't do. In the second quarter,
Target's same-day fulfillment services, which include curbside pickup, jumped
273%, driving overall e-commerce sales up 195%, and more than 90% of its total
sales were fulfilled by stores.
On the earnings call, management noted that same-day
fulfillment options like curbside pickup are much less expensive than shipping
to the home, and growth in same-day fulfillment helped lift its profit margin.
Same-day fulfillment from its stores gives it both a cost and speed advantage
One of Target's biggest strengths is its private brands. In
addition to name-brand products at its stores, the company sells a wide array
of owned and exclusive brands that give shoppers a unique product selection and
provide a distinct advantage to the company. Target's new private food brand,
Good & Gather, reached more than $1 billion in sales less than a year after
its launch, giving the company a number of billion-dollar brands. Management
also touted strong results with its All in Motion activewear brand, which it
launched shortly before the pandemic in January.
CEO Brian Cornell explained the advantage of private brands
on the earnings call, saying: "Together, these brands whose sales have
outgrown national brands so far this year, offer guests quality and style at an
unmatched value while enhancing Target's differentiation and delivering
attractive gross margin rates." Since Target can control the cost inputs
and pricing in private brands, they tend to be more profitable.
While Walmart and Amazon both offer private brands, Target
collects a greater percentage of its sales from its exclusive lines, which
helps give it higher profit margins than its peers.
Target's second-quarter results may prove to be an anomaly,
and management warned not to extrapolate those results into the third quarter,
but the near-10% operating margin shows the results Target can deliver when its
e-commerce business scales up and it avoids things like markdowns. Even in their
own blockbuster quarters, Amazon and Walmart couldn't come close to matching
that level of profitability.
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