Target's Doing Retail Right (Just Remember, It's Still Doing Retail)

In a retail landscape where Amazon (NASDAQ: AMZN) and Walmart (NYSE: WMT) loom large, and everyone else has to maneuver around them, Target (NYSE: TGT) is putting together a remarkably effective strategy. You'd be hard-pressed to find anything negative to say about its fiscal first quarter, given same-store sales rose by just under 5%, and digital revenue grew 43%, too.

However, beyond the cheerleading, there's more to the story, and in this segment from MarketFoolery, host Mac Greer and analysts Emily Flippen and Jason Moser discuss both the obvious upsides and the less noticeable downsides, as well as which rival is Target's bigger competitive threat, the outlook for the stock, the impact when a discount retailer partners with a high-end brand, and more.

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This video was recorded on May 22, 2019.

Mac Greer: But let's start with Target getting it done. Shares of Target up more than 9% on earnings at the time of our taping here. Same-store sales up more than 4%, 4.8%, Jason, for the quarter. Now, we've got strong growth in their digital sales, that includes orders that you make online and pick up at the store. Jason, what's not to like here with Target?

Jason Moser: There is not a lot in there to not like. And that's a weird way of saying you have to like exactly what they reported here this quarter. I mean, in a world where Amazon and Walmart have really been at the forefront of the conversation here, and Walmart, obviously, investing a lot of money into growing their e-commerce business and competing more with Amazon, Target has kind of been able to sort of just keep under the radar and do their thing. But you look at what has gone on over the past few years, CEO Brian Cornell has got to be feeling really good about where things stand right now. And it's not to say that it's been a straight line up. But when he got there, I think back in 2014, I mean, there was the realization that they needed to make investments in digital and become a 21st century retailer. And lo and behold, I think they've gotten there. If you look at some of the numbers -- we talked about comps there, this was actually their eighth consecutive quarter of comp growth. When you look at digital sales, up 42% for the quarter, digital accounted for more than $5 billion in sales last year, supposed to account for more than $6 billion in sales this year. Now, when you put that in context of a top line that's around $76 billion, it's not obviously super important, but it's becoming more important as time goes on. And obviously, it's gaining some traction.

Emily Flippen: It was a good quarter for Target, for sure. But you'll notice that with all of these great comp improvements, and while it is notable that Target is such a retailer that's succeeding in such a challenging industry, it's still a retailer. So you'll notice that despite the company continuing to raise revenue, their cash flow from operations were actually negative. They actually paid out more in cash than they brought in. That's largely thanks to the fact that they're really paying down in large portions their $10 billion of accounts payable. There's a little bit of, I guess you could say earnings management going on here as well, because they knew it was going to be a good quarter, so they take that hit during the quarters when people are going to be focused on the near 5% same-store sales growth.

Greer: OK, so you're saying maybe we need to slow our roll a bit with Target.

Flippen: I don't think you should slow your roll. I still like Target as a company. But I will say, it's still a retailer. I think people can kind of forget that when you have quarters like this. Target is differentiated, has a differentiated strategy. But it still takes a lot of financing and a lot of work to make these companies succeed over the long term. And you'll notice that management expected growth to slow slightly throughout the rest of the year. So, while it's a good quarter, I like Target in general, personally, I think there are better places to put your money.

Greer: OK, let's talk about that. Jason, you mentioned some of the competition. Who's the bigger threat to Target: Walmart or Amazon?

Moser: I would look at Walmart as probably being the bigger threat because it's the more comparable of the two. Walmart and Target are kind of those traditional retailers that are having to pivot and change their business model a little bit, at least, in order to compete more with Amazon. One of the signs that they're doing a good job of it, they wanted to put their physical stores at the center of their fulfillment. That's that ship-from-store mentality that a lot of these retailers are approaching these days. They handled over 80% of their digital volume from the actual stores. So they've done a good job of turning those stores into stores/fulfillment centers.

But I think Emily makes a really good point here -- it costs a lot of money to keep that operation going. It's not like they've reached the finish line and now everything's hunky-dory. I mean, this is stuff that they had to just keep on doing essentially on into forever in order to stay competitive. And it really is one of the most competitive markets out there today, when you look at what Amazon and Walmart are doing as they jockey for position. So, I mean, yeah, good quarter, for sure...I don't personally own shares of Target. I don't know that this report makes me want to own shares of Target. But I mean, you have to commend them for a job well done.

Flippen: Definitely. Target's always been forward-thinking in that regard. I'd also have to agree, though, that Walmart seems to be the bigger threat. I use "threat" loosely, because I think there's a world in which Target and Walmart both succeed. But in terms of direct competitors, while Amazon does have some overlap, I think the core customer Walmart is trying to win over from Target by introducing things like their own independent retail lines for clothing, changing their pricing structure, changing the experience of shopping in their stores, improving the online pickup sales. All these areas that made shopping at Target a more pleasant experience than shopping at Walmart, management of Walmart is slowly trying to change.

Greer: I was surprised when I was looking at the stock, and looking at the stock chart over the last five years. Shares of Target are up, but Target has lost to the market over the last five years. When you look out over the next five years, do you think Target's a market-beater?

Moser: We had that same question in regard to Walmart, when we were talking about Walmart vs. Amazon. I could see a world where Walmart could very well be a market-beater. I think Target's got a little bit of a tougher road ahead. I think that the biggest problem for them is going to be the spending that they're going to have to do on an ongoing basis. I think that could prevent the stock from offering any real attractive gains for investors. I mean, I don't know that I'd be looking at Target today as an investment where I'd call it a market-beater.

Greer: They made a big kerfuffle this week with their partnership with Vineyard Vines. You know, the pink whale? It's kind of stylish. I think of them as Polo-esque. And this stuff just immediately sold out online on Saturday, and in the stores on Saturday, so much so that by Sunday, there were 9,000 of these Target-Vineyard Vine clothing items on eBay already.

Moser: Which is insane! I guess we never really thought of Walmart and/ or Target as fashion-forward companies. I think we posed the question more than once that, with Walmart, certainly, making some of those acquisitions and trying to become a little bit more of an e-commerce business and bring some brands under their umbrella, does a brand lose some cachet when it becomes a part of the Walmart family? The same question should be asked of Target? Does a brand lose some of that cachet if it becomes part of a discount retailer's world? I don't know. I mean, I would think probably.

Flippen: Maybe not as much as it used to. If you're not competing on price, you're competing on service. Historically, Walmart's always been the price leader and Target's been that service leader. And having Vineyard Vines is probably part of that service experience. You're getting that distribution, that demand, but you're not really taking the brand to as low of a level, I guess you could say, as Walmart.

That being said, like I said, I feel like Walmart is slowly moving to be both a low-cost provider and a service provider. If they're able to succeed in doing that, then one-trick ponies like Vineyard Vines aren't going to be enough to save Target.

Greer: OK, well, I think a brand loses cachet when I start to wear it. [laughs] So, that's probably a good sign for Vineyard Vines. I don't wear Vineyard Vines.

Moser: Unless it's Kirkland. Kirkland, that's when it's on the way up.

Greer: It's timeless.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Emily Flippen has no position in any of the stocks mentioned. Jason Moser owns shares of Amazon. Mac Greer owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends EBAY. The Motley Fool has a disclosure policy.