Don’t worry about Target’s $ 4 billion in annual shopping
Target (NYSE: TGT) recently announced the results of its last quarter of fiscal 2020 in line with the update management provided a few months ago. Revenue increased 21% year-over-year to $ 28.0 billion, and net profit jumped 66% to $ 1.4 billion as the big-box store’s investments in e-commerce and same-day order fulfillment has paid off during the pandemic.
The really big news, however, was Target’s new annual capital expenditure of $ 4 billion. That’s a big increase from what Target was spending the last time they made a strategic announcement like this, but the timing couldn’t be better. After a huge year of profitable gains, the company will invest more in the areas of its business that have made it successful in a new world of e-commerce.
Target increases its spending
During the fourth quarter fiscal 2020 results call, Target management took a little extra time to discuss his plans In the years to come. And after sales growth of $ 15 billion in 2020 – more new revenue than the previous 11 years combined – the priority will be to keep those gains and build on the successes.
In dollar terms, the company will spend up to $ 4 billion on capital spending in fiscal 2021 (spending on long-term assets like real estate, equipment and technology). For comparison, capital spending was $ 2.6 billion in 2020 and $ 3.0 billion in 2019. This was part of the aggressive spending the company launched in late 2016, which included the acquisition of personal shopper and delivery service. Shipped in 2017.
Target’s aggressive spending wasn’t exactly greeted with investor enthusiasm in 2016, but it has paid off during the pandemic. Now it’s a much bigger business than it used to be, and it’s time for some more upgrades to support the expansion. And this time around, Target’s forecast for capital spending of around $ 4 billion a year is nothing to worry about since its strategy has been proven to work.
Image source: Getty Images.
The Target in-store experience is a differentiator
Where exactly will this $ 4 billion be spent? First of all, on its stores – the brick and mortar locations. In the era of e-commerce? Yes, because for Target, all of its digital activity is based on its real estate.
You see, Target actually posted a 7.2% increase in same-store sales in its physical locations (the rest of the 19.3% full-year comparable sales increase was from the Internet). One of the main reasons for this is the widespread deployment of curbside same-day collection. Target has reported that many of its customers say they will continue to use this feature even after the pandemic, so some redesign will be needed to better accommodate buyers.
The company also plans to open 30 to 40 small format stores each year for the foreseeable future. It makes sense to expand its footprint. The majority of Americans live within 10 miles of a Target store, and the company wants to reach many more in urban centers with these new, smaller locations.
And since 95% of all orders are fulfilled directly from a Target store these days (compared to a fulfillment center like most ecommerce businesses), it makes sense to increase that reach as the business tries. to build on its differentiated digital commerce model that allows direct shipping, pickup or same day delivery via Shipt.
In addition to renovations and new openings, Target is a much bigger business than it was a few years ago. Despite this growth, it was able to channel all of its new activity to its existing real estate, hence the sharp increase in net income last year.
But now is the time to increase the capacity of its supply chain, and part of the $ 4 billion in spending will go to two new distribution centers this year and two more in 2022. In addition to the chain of primary supply, Target says it will increase its game in last mile delivery, presumably with more investment in Shipt to expand the service to more markets.
And a final point of emphasis will be placed on the additional differentiation of its merchandise. Target has signed new agreements with Levi Strauss, Ulta Beauty, and Apple, but the constant expansion of its own internal brands has been the real winner. Since 2016, Target has launched more than 30 of its own brands across all store categories, many of which (like its All In Motion brand of workout wear and home gym equipment) have quickly grown into corporate businesses. ‘a billion dollars.
With the department store industry in constant decline, Target continues to gain market share with its unique shopping experience for everything from groceries to basic household items to clothing. Thus, it plans to continue to launch its own brands to capitalize on this success.
A temporary blow to the bottom line
Higher expenses mean profitability will suffer, but management said it expects operating margins above the 6% rate posted in fiscal 2019, but below the 7% recorded in 2020 at most. height of the pandemic. If the company can maintain sales to new customers and continue to grow at a steady rate, profits will also increase over time, supporting another expected dividend increase later this year (which the company is now paying since decades).
It might not be the fastest growing ecommerce company, but there’s still a lot to like about Target. Rather than worry about the new annual spend of $ 4 billion, it looks like it will be money well spent, given the success the big box store has had to date in establishing itself as a leader. of digital and physical retail.
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Nicolas rossolillo owns shares of Apple and Target. The Motley Fool owns stock and recommends Apple and Ulta Beauty and recommends the following options: March 2023 short calls at $ 130 on Apple and March 2023 long calls at $ 120 on Apple. The Motley Fool has a disclosure policy.
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