Target Is Cashing in on Convenience Focused Consumer Trends

One of the key metrics taking Target's  (TGT) stock higher following its earnings report Wednesday morning was its strong performance in online sales, which could make it a key brick and mortar player in the battle against Amazon's (AMZN) e-Commerce dominance.

Shares of the Minneapolis-based retailer have roared to their highest level in a month after a pre-market earnings print, helped in no small part by stellar performance in e-Commerce.

"Comp digital sales simply blew the doors off of the place at 42%, even better than the 37% that Walmart (WMT) posted just last week," Real Money contributor Stephen "Sarge" Guilfoyle wrote in his column on Wednesday. "The point there is that these two are becoming effective competitors on Amazon's turf. Their many locations that allow for in-store pick-ups and shorten delivery times have made them viable."

Company management highlighted the importance of its online investments in recent years, allowing it to now stand out.

"I think our decision years ago to put our stores at the center of our fulfillment strategy is paying off with accelerated growth," CEO Brian Cornell said. "Our store and supply chain team continue to roll out and scale up an interesting leading suite of digital fulfillment options. Our guests are responding enthusiastically, driving rapid growth of our same-day options, including Drive-Up, in-store pickup and Shipt."

Shipt, which is a key ingredient to the company's e-Commerce success was acquired by Target in 2017 for $550 million in order to accelerate growth in delivery services.

The buyout appears to be paying dividends so far, driving comparable sales and the robust e-Commerce growth that helps the stock stay in the metaphorical winner's circle of retail stocks.

"At Shipt, we continue to grow the number of marketplace participants, driving scale and relevance to the platform," Cornell added.

According to the company, 25% of the comparable sales growth in the first quarter, one of the crucial metrics for the stock implication today, was driven by e-Commerce success.

Convenience Is Key

Homing in on consumer trends, COO John Mulligan explained the company's capability in getting goods to consumers at lightning speed.

"We offer in-store pickup in every one of our 1,851 locations, and we walk the order out to the parking lot in more than 1,250 of them. There are no fees for either of the same-day options," he told analysts on Wednesday. " Guests at more than 1,500 stores across more than 250 markets can order from Target through our Shipt personal shopping service, and have their order delivered to their front door, kitchen table, even their refrigerator if they want in only an hour or two."

Mulligan added that there are 100,000 Shipt users at present and that is only slated to grow as more consumers opt for the convenience of the service and Target's ability to successfully fulfill orders is perfected.

"Our analysis indicates that the new services like Drive-Up and Shipt are driving incremental trips for Target rather than simply replacing other forms of shopping," Mulligan added. "Specifically, first quarter digital sales from in-store pickup increased more than 80% from a year ago even as Drive-Up and Shipt grew even faster."

Essentially, the digital strategy is driving nearly all aspects of the business at this point.

Margin Mitigation

So, while the drive to digital will continue to compress margins, the fact that it can drive such sales growth irrespective of weather conditions is a key bull indicator for the stock especially as the economics of the investments even out in the long term.

"As we move digital fulfillment from upstream DCs to stores, we see a significant reduction in expense and we talked about a 40% reduction," Cornell explained. "When we go from an upstream DC to some of our same day fulfillment offerings like Order Pickup and Drive Up, we see a 90% reduction in costs...as that continues to mature and grow, we're going to see some of the benefits flow through our P&L."

Amazon is certainly still the 800 pound gorilla in e-Commerce, But Target and Walmart are both showing that there is plenty of room for traditional retailers to pick up on the digital tailwind consumer trends are projecting. Zeroing in on those specific retail stocks that can elbow their way into e-Commerce will be a key factor moving forward.

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