Retail analyst explains: ‘integration of bricks and clicks’

Investors applauded Target Corporation (NYSE: TGT) Wednesday morning for smashing expectations but this one analyst attributes the stock’s strong gains to its “integration of bricks and clicks.”

Combining online with offline

Target’s Wednesday morning second quarter report is highlighted by a 195% growth in e-commerce sales, aided by the company’s strategy of using stores as “hubs” or mini-fulfillment centers, Cowen retail analyst Oliver Chen said on CNBC’s “Squawk Alley.” In fact, Target’s management deserves credit for re-inventing the purpose of its stores to integrate the entire shopping journey.

Target even found a way to combine the “instant gratification” rush associated with digital shopping and having an item in a customer’s hands within a few short hours. In addition, the company may also now hold the status of being the “easiest place to shop.”

“Customers want it all,” the analyst said. “They want physical, they want digital — they want [to buy] groceries and hardlines how they want it.”

Target a top pick at Cowen

Target is considered a top pick or top investment idea at Cowen, along with rival retail chain Walmart Inc (NYSE: WMT), Chen said. Both stocks offer investors a form of safe haven in the “uncertain environment.”

Between the two, Target’s stock offers investors a more favorable stock valuation, a stronger probability of beating comp expectations in future earnings reports, and better exposure to the unofficial back-to-school shopping holiday.

By contrast, mall-based retailers like Kohl’s Corporation (NYSE: KSS) aren’t seeing the same momentum as Target, the analyst said. Specifically, Kohl’s earnings report showed e-commerce sales underperformed Target’s growth at 58% and total revenue was down 23%.

Kohl’s also painted a more grim picture, as CEO Michelle Gass said in a statement obtained by CNBC: “As we look ahead, we are planning for the crisis to continue to impact our business in the near-term.”

Stores are an asset, not a liability

Much has changed over the past few years in the retail space in how investors approached online shopping, D.A. Davidson analyst Michael Baker also said on “Squawk Alley.” Retailers needed time to figure out how to best invest in their online businesses, and successful ones positioned their stores to be an asset to their business, rather than a liability.

Five years ago, retail investors automatically equated retailers with a heavy physical presence as being “in trouble” and the stock was viewed as a potential short sell opportunity, he said. Today it is apparent this thesis is flawed and further investments in technology to drive sales represent “the right thing to do” to justify a higher stock multiple valuations.