Purpose (NYSE: TGT), Amazon (NASDAQ: AMZN), en Walmart (NYSE: WMT) all wowed investors this earnings season with blowout numbers.
Americans turned to these essential retailers to meet their needs during the pandemic, and all three benefited from their strong e-commerce operations, as Americans turned to online shopping to avoid risks of exposure to the virus in stores .
In the battle for the American consumer, Target is often a thinker alongside Amazon and Walmart. The red-letter retailer is much smaller than those two rivals, who dominate the retail landscape, but that does not mean Target is playing second fiddle here.
Target posted just 24.3% similar sales in its second quarter, and adjusted earnings per share nearly doubled, to $ 3.38. The big box chain is clearly emerging as a winner of the pandemic era, and one big reason why is that both Amazon and Walmart are profiting well in profitability.
Compared to Amazon’s North American e-commerce segment and US company Walmart, Target, which only serves stores in the US, has a much broader 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 US 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 measures of a company’s strength, and Target’s ability to convert its sales into significantly higher profits in the last quarter is a sign of the retailer’s performance. Here’s how the company does it.
Image Source: Purpose.
A variety of product selection
Americans turn to all three of these retailers when they need something from eggs to a bike to a new set of pans, but the distribution in sales differs between each retailer. Walmart accounts for more than half of its grocery sales, making it the country’s largest retailer, but that category tends to be lower than other segments. As a leading online retailer, Amazon sells far more individual stock units (SKUs) than its competitors, but the company’s strongest category is electronics. It often uses its website to promote its own products such as Echo speakers, Kindle e-readers, or Fire TV sticks, which it tends to sell at or near cost to support media consumption. As an e-commerce company, Amazon also has to spend heavily on things like shipping and return.
Target, on the other hand, operates in five business segments – food and beverage, beauty and household essentials, hardlines such as electronics and toys, clothing and accessories, and home and decor furnishings – with sales roughly divided among the five. Target’s “style” categories such as clothing and home have a higher margin than shopping, but the combination of these companies gives Target a unique power. Shopping frequents visits, and encourages purchases for higher-margin discretionary items in areas such as clothing. This strategy paid off in the second quarter because Target’s apartment sales went up by double digits, even as sales in clothing stores fell by 36% during that period, according to the Census Bureau.
Omnichannel execution
Target and Walmart have distanced themselves from other brick-and-mortar retailers by founding strong e-commerce businesses, and their stores play a key role in their online fulfillment.
However, Walmart has led with shopping in its e-commerce business, and opened more than 3,000 online location farms for grocers, but it’s even harder to generate a profit in that category with the extra work required for online pickup. Walmart’s US e-commerce CEO Marc Lore has essentially cited online shopping as a loss-making leader for the company. Walmart has also struggled in other areas. Acquisitions of digital land-based brands such as Bonobos have not panned as hoped, and it excludes 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 fresh and frozen shopping items available for pickup. It also uses stores to fulfill a large percentage of their orders, something that Amazon cannot do. In the second quarter, Target’s same-day fulfillment services, which include sidewalk pickup, jumped 273%, total e-commerce sales increased by 195%, and more than 90% of their total sales were completed by stores.
On the call of merit, management noted that same-day completion options such as pick-up for sidewalks are much less expensive than home delivery, and same-day fulfillment growth helped lift the profit margin. The same day fulfillment from their stores gives it both a cost and a speed advantage over Amazon.
Private label
One of Target’s biggest strengths is its private labels. In addition to brand name products in their stores, the company sells a wide range of proprietary and exclusive brands that give shoppers a unique product selection and give a distinct advantage to the company. Target’s new private food brand, Good & Gather, reached less than $ 1 billion in sales less than a year after its launch, giving the company several billion dollars in markets. Management also showed strong results with its brand All in Motion activewear, which launched it shortly before the pandemic in January.
CEO Brian Cornell explained the advantage of private markets on the call of merit, saying: “Together, these markets whose sales have grown national markets so far this year, offer guests quality and style at an irregular value while differentiating of Target improves and attractive gross margin provides rates. “Since Target can control cost inputs and prices in private markets, they tend to be more profitable.
While Walmart and Amazon both offer private labels, Target collects a larger percentage of its sales from its exclusive lines, which helps it generate higher profit margins than its peers.
Target’s second quarter results may appear to be an anomaly, and management did not warn against extrapolating these results in the third quarter, but the company’s margin of almost 10% shows the results that Target can deliver as its e- commerce business upscaling and it prevents things like markdowns. Even in their own blockbuster quarters, Amazon and Walmart could not come close to that level of profitability.
