3 reasons to bet on the target in 2022
Target (NYSE: TGT) Shares jumped on Tuesday as the company outlined its long-term growth strategy and raised its revenue and earnings-per-share growth targets.
The omnichannel retailer has stood out during the pandemic with adjusted earnings per share doubling and growing its same-day fulfillment services nearly 600% over the past two years. But beyond the headlines, there are under-the-radar factors that should also boost investor confidence in the stock this year. Let’s take a look at a few of them.
1. Starbucks pickup
Drive Up, Target’s curbside pickup program, has been its primary growth driver over the past two years, with sales up nearly 1,300% during that time. Other retailers offer curbside pickup, but most don’t have the breadth of merchandise that Target has; nor do they have locations spread across all 50 states with a mix of urban, suburban, and rural locations.
Target is about to make Drive Up even more appealing by adding Starbucks delivery, giving it an edge that no other retailer can match. At least 1,300 of Target’s 1,926 stores have Starbucks coffee, and the company will soon allow customers to place Starbucks orders with their Drive Up orders.
On the Target Results call, the company described it as a pilot program it will test in select markets this summer and fall, though it said the ultimate goal is to make it available in national scale. The program looks likely to be a big winner with customers, giving the company another unique competitive advantage.
2. Ulta Beauty Expansion
Brand partnerships like those with Starbucks and SVC are another Target strength, and last year the company launched a store-to-store partnership with Ultimate Beautyone of the leading retailers of beauty products and services.
The program was initially launched in 100 Target stores last August, and management was pleased with the results, saying sales per square foot are strong and customer response has also been positive. It has seen an increase in mid-teen beauty sales in stores with Ulta stores and add-on benefits in other categories as well.
The company plans to add 250 new Ulta stores in Target locations with a goal of reaching 800 in total. This expansion should generate traffic for the company, both for in-store customers and for services such as Drive Up. Target’s “cheap chic” brand helped it attract a partner like Ulta while a competitor like walmart probably couldn’t.
3. Advertising activity is ramping up
Amazon built a multi-billion dollar business by opening its e-commerce site to advertising, and in fact is now the third largest digital advertising company behind google and Metaplatforms. Walmart followed suit by taking control of its own media group to exploit the potential of advertising. Now Target seems to be doing the same thing.
During the earnings call, the company said Roundel, its media arm formerly known as Target Media Network, generated more than $1 billion in value last year and was the second most significant of its $1.4 billion “other income” after credit cards. Management said it expects Roundel’s value to reach $2 billion over the next few years, explaining that in addition to the revenue it brings to Target, it also adds value to its suppliers and customers.
Nearly 20% of Target’s sales now come through the digital channel, so it makes sense that the company monetizes them through advertising, much like Amazon and now Walmart. Target’s ad business will never be as big as Amazon’s, but the model is there for a high-margin company to tie into its e-commerce platform.
The tailwinds of the pandemic are fading and the challenges of supply chain, cost inflation and labor shortages are mounting, meaning Target’s growth rate in 2022 will be probably closer to historical standards. However, the company continues to find new ways to differentiate itself from the rest of the retail industry, and that will continue to pay off for investors.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Jeremy Bowman owns Amazon, CVS Health, Meta Platforms, Inc., Starbucks and Target. The Motley Fool owns and recommends Alphabet (A shares), Amazon, Meta Platforms, Inc., Starbucks and Ulta Beauty. The Motley Fool recommends Alphabet (C-shares) and CVS Health and recommends the following options: $100 short calls in April 2022 on Starbucks. The Motley Fool has a disclosure policy.
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