Initially, Target (TGT  ) struggled to get its e-commerce operation going. For retailers, it's a matter of survival as foot traffic declines, and future generations are more likely to go online for their shopping. This was evident in the company's share price, as it underperformed the stock market (SPY  ) between 2009 and 2017.

However, the company recognized this issue and began aggressively investing in its e-commerce platform. It's been remarkably successful given this late start, as it's now eight in online sales in the US with 1.2% of the total e-commerce market. Further, it's chosen a different path than Amazon (AMZN  ) or Walmart (WMT  ). Amazon has over 100,000 sellers on its platform, while Walmart has over 30,000 sellers.

In contrast, Target has only 60 merchants selling on its platform, creating a much more curated experience with higher quality controls. This has paid off as its share price has outperformed the broader market over the last three years.

Margins Squeezed

Target's first-quarter earnings revealed that nearly all of its revenue growth came from its online sales which increased 141% compared to the first quarter last year. A part of this acceleration is due to the coronavirus pandemic, as the store's same-day fulfillment and curbside delivery are perfectly suited for these conditions. As a result, the online segment accomplished multiple quarters of growth in one quarter.

One drawback is that Target's margins were squeezed. Customers were buying lower-margin items, and there were increased supply chain and fulfillment costs. The company also had to increase staff to meet this demand and for increased cleaning expenses. Further, Target's unique proposition of same-day, in-store pickup for the vast majority of its products is also costly but has been crucial in its platform's success.

Focus on Profits

Now that Target has established its foothold in the online retail world and found a strategy to differentiate itself, it's focusing on converting sales into profits. The company is setting up sorting centers for its packages to bring down "last mile" costs. Currently, most of this sorting is done at Target's stores.

The sort centers will be smaller than Target stores and located in areas with large amounts of package volume. They will process and organize packages either for same-day pickup or home delivery. These will have more efficiency than stores since they will be designed and intended for this primary purpose and lead to lower costs.

There will be numerous headwinds with increasing profits for Target. The biggest is that competition for market share remains intense especially with Walmart and Amazon's thirst for market share. Both companies are focused on growth and are willing to eat costs. They already have a national, network of warehouses and distribution centers that are used by the company and the merchants on its platform.