Target Corporation

Target,   the big box retailer, posted fiscal first quarter earnings and revenue which   beat both bottom and top line Wall Street estimates. This was largely due to   stimulus cheques and a reopening economy, as customers returned to browse   merchandise inside stores.

Total   revenue grew 23.4% to $24.2 billion. Comparable sales were up 23%. Traffic at   Target stores, and on its website, grew by 17% and the average basket size   rose by 5% in the three-month period.

Apparel   sales increased by over 60% versus the year-ago period, largely due to base   effects, and was the strongest merchandise category in the quarter, as   customers prepare for busy social calendars after exiting lockdowns. Food,   beverage and essentials (which were outperformers at the height of the   pandemic) saw growth drop off to the low-to-mid single digits.

Target   had several unique advantages during the pandemic. It fulfills most online   orders at its stores. This helped buoy company profits during the crisis. It   was also ahead of other retailers in raising employee wages, which protected   it from the labor crunch which other retailers are currently grappling with.   And it launched and grew numerous, higher margin, private label brands. In   this recent quarter, sales of its own brands rose 36% from the same period a   year ago - the most in the company’s history.

Operating   income rose 407% to $2.4 billion in first quarter and it enjoyed significant   margin improvement. Gross margins also improved to 30%, reflecting the   benefit of a favorable category mix and merchandising actions, primarily from   low markdown rates.

· Net   income jumped to $2.1 billion, or $4.17 per share, from $284 million, or 56   cents per share, a year earlier. Excluding once-offs, the retailer earned   $3.69 per share, which was a massive beat relative to the $2.25 per share   analysts had expected.

The retailer   said it continued to grab market share, gaining a further $1 billion, after   clinching $9 billion in market share last fiscal year. Target provided   second-quarter forecasts much higher than Wall Street estimates, expecting   mid-to-high single digit growth in comparable sales and improved operating   margins. As of the end of the first quarter, the Company also had   approximately $3.4 billion of remaining capacity under the share buyback   program.

For   the trailing twelve months through first quarter 2021, the after-tax return   on invested capital (ROIC) was an impressive 30.7%. It ended the period with   cash and cash equivalents of $7.8 billion, up nearly 70% year-over-year. Free   Cash Flows (FCF), the cash a company generates after accounting for cash   outflows to support operations and maintain its capital assets, improved to   $1.56 billion from $533 million a year ago.

·Target   is a very impressive business which appears fairly priced on FCF yield of   1.4%. It does however, on an earnings multiple of 18x, compare favourably   against Amazon (61x) and Walmart (33x). Whilst we like Target, we instead own   Amazon.com in managed portfolios and the Cratos BCI Worldwide Equity Fund.