Target's CFO on the Q2 Profit Spike: "Well Outside Anything I Have Seen in My 15 Years at This Company"

Target (NYSE: TGT) gave investors plenty to celebrate last week in its second-quarter earnings report. Sales growth and adjusted earnings each set a new record as the pandemic, combined with federal stimulus payments, lifted the retailing industry.

But Target captured more than its fair share of that industry growth. In fact, market share gains for the discount retailer accelerated in Q2 as compared to the prior quarter.

In a conference call with investors, CEO Brian Cornell and his team explained why more shoppers are choosing Target these days, and below we'll look at some highlights from that chat.

A woman checks her smartphone while shopping.

Image source: Getty Images.

A winning approach

These [same-day fulfillment] services offer speed, reliability, convenience, and value to our guests. They are digital capabilities enhanced by human interaction, even though they're contactless. This explains why they generate some of the highest levels of satisfaction of anything we provide.
-- Cornell

Rivals like Walmart (NYSE: WMT) are finding success with fulfillment options that allow shoppers to order online and pick up orders at stores almost instantly. But Target believes its multichannel selling approach is an even bigger competitive asset, as demonstrated by the 270% jump in its same-day fulfillment services.

This figure includes an over 700% spike in drive-up order fulfillment and is the main reason why the chain doubled its market share growth in Q2 to push its share gains to over $5 billion in added income so far in 2020. "Rather than slowing down," Cornell said, "our share gains accelerated in the second quarter." Target's comp sales performance was roughly double Walmart's over the last few months. 

Booking new profits

Our second-quarter operating margin rate of 10% was about 280 basis points higher than a year ago. This performance was well outside anything I have seen in my 15 years at this company and certainly beyond anything we would have anticipated going into the quarter.
-- CFO Michael Fiddelke

Target's profitability improvement was one for the record books, with operating margin soaring to double digits from roughly 7% a year ago. It helped that consumers tilted their spending toward discretionary products like apparel and electronics, which carry higher margins than grocery sales. But the chain also got big benefits from increasing efficiency in its digital fulfillment categories.

KR Operating Income (Quarterly) Chart

KR Operating Income (Quarterly) data by YCharts.

These wins pushed cash flow and earnings to new quarterly highs despite elevated spending on labor, store maintenance, and the e-commerce platform.

Not resuming stock buybacks yet

If you looked casually at our current cash position and second-quarter results, you might wonder if we were ready to resume share repurchase activity. And the answer to that question is not yet.
-- Fiddelke

The gushing profits and elevated cash holdings aren't enough to convince Target to loosen the reins on capital returns, executives said. It was only one quarter ago, after all, that the retailer saw profits decline by over 60% due to consumer behavior changes due to the COVID-19 pandemic. Widespread economic shutdowns might be behind us, but there are still major risks around additional outbreaks and a potentially deep recession.

These question marks have Cornell and his team feeling cautious despite having booked some of the best growth and cash flow metrics in the company's history. "While we have very strong confidence in our long-term prospects," he said, "we believe it's the prudent decision to preserve liquidity in the current environment."

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Demitri Kalogeropoulos owns shares of Costco Wholesale. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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