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Right On, Target

Target and Lowe's reported results

Image source: Clipart, Marvel, Liga Cerina, Ivan Smuk, MNI - Shutterstock

What's going on?

On Wednesday, better-than-expected earnings updates from established US retailers Target and Lowe’s made for a curious comparison with retail startups Global Fashion Group (GFG) and Jumia.

What does this mean?

Lowe’s update could keep industry neighbor Home Depot up at night: it reported better-than-expected quarterly sales growth and profit. And major retailer Target (“Tar-jay”) was right on the money on Wednesday, also posting higher-than-expected sales and profit. The latter figure in particular might’ve surprised investors given Target’s significant investment in ecommerce, which typically hampers profits. Target, like Walmart, capped off its hot streak by raising its profit prediction for the year.

But investors were reminded high-growth ecommerce isn’t without cost: German-listed online fashion retailer GFG reported 17% revenue growth last quarter, but higher losses compared to the same time last year. And likewise, second-quarter results from Jumia – Africa’s answer to Amazon – showed it’s some way off breaking even too.

Why should I care?

For markets: Startups vs. grownups.

GFG and Jumia specialize in emerging markets, so they don’t have much crossover with US retailers – except when it comes to competing for global investors’ cash. Investors must decide whether they’d prefer a high-growth but loss-making startup or a slower-growth but profitable incumbent. This round went to the stalwarts: Target and Lowe’s shares rose by 20% and 10% (tweet this), perhaps because they’re reinvesting profits into their own “startup-esque” brands. Meanwhile, GFG’s stock rose 2% and Jumia’s fell 10%. Investors might be wary about both companies’ links with notoriously aggressive tech investor Rocket Internet.

The bigger picture: Suppliers are the next battleground.

Delayed US tariffs on some Chinese products will keep the wolf from some retailers’ revolving doors until Christmas, but they’ll need to convince suppliers not to increase prices to keep it fed through 2020. The biggest retailers might be influential enough to keep costs down, but startups could find they don’t have enough leverage – putting profitability further out of reach.

Originally posted as part of the Finimize daily email.

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