Categories Analysis, Retail

Will the pandemic help or hurt Target (TGT)?

The company’s investments in pay hikes and benefits are expected to drive up costs

As the coronavirus pandemic rages on, major retailers continue to experience huge demand for food and essential items both in their stores and online. Target Corporation (NYSE: TGT) is one such retailer that has seen a huge uptick in sales in this current environment.

The company stated in a press release yesterday that it has been experiencing unusually high traffic and sales in its stores as people stock up on groceries, medicines and cleaning supplies. Comparable sales increased 3.8% in February.

Will the pandemic help or hurt Target (TGT)?
Image for representation only/ Image Courtesy: nrd/Unsplash

This growth spiked in March with solid increases in the Essentials and Food & Beverage categories. Comp sales for the month-to-date period in March have increased over 20% compared to the same period a year ago, with a comp sales growth of over 50% in Essentials and Food & Beverage. This growth in sales will help in margin expansion even as prices stay low.

However, Target has seen a slump in the Apparel & Accessories category, which saw comps drop more than 20% in March. Sales declines in higher-margin categories are likely to impact margins. The company’s investments in pay hikes and benefits as well as additional efforts being undertaken to tackle the current health crisis, like sanitization, are expected to drive up over $300 million in costs.   

Target has postponed some of its store remodels and new store openings to next year due to the crisis and also withdrew its first quarter and full-year 2020 guidance amid the uncertainty.

Despite the situation appearing glum, it can be assumed that Target is not likely to get hurt by the pandemic. For starters, the company’s fundamentals are strong. Total revenues increased 3.7% in fiscal year 2019 with earnings growth of 15.5%. The retailer delivered comp sales growth of 3.4% along with margin expansion during the year.

Target saw comparable digital sales growth of 29% during the year. Same-day services accounted for the majority of the comparable digital sales growth. These services have seen a spike in the current situation and this could very well boost digital sales growth. The company has been investing in its digital capabilities like its peers and these efforts are likely to pay off now more than ever.

The company has continued to expand its store network and this will help in catering to a larger number of customers. In terms of growth by category, although apparel is seeing weakness, retailers in general have reported seeing increases in sales of casual wear as people stay indoors more. Target will also benefit from this trend. Also, the huge sales increases in food and essential items might be sufficient enough to offset the declines in other categories.

In general, analysts seem to be bullish on Target’s stock and have rated it as Buy. Although the stock has declined 9% in the past one month, it might see a pickup going forward if the current momentum in sales continues.

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