Target Corp. more than doubled Wall Street’s earnings projection for its fiscal 2020 second quarter and saw net and comparable sales surge over 24%, with the latter being “the strongest we’ve ever reported,” Chairman and CEO Brian Cornell said.
For the quarter ended Aug. 1, net sales came in at $22.7 billion, up 24.8% from $18.18 billion a year earlier, Minneapolis-based Target said Wednesday. Total revenue rose 24.7% to $22.98 billion.
Overall comparable sales jumped 24.3%, reflecting gains of 10.9% for stores and 195% for digital channels. Target noted that online business represented 13.4% of its total comp-sales growth, and stores fulfilled over 90% of sales during the quarter.
“In terms of channel mix, we saw very healthy growth across the board, with store-originated comparable sales growing 10.9% and digital comp sales up nearly 200%. It's worth pausing to acknowledge that, at just under 11%, this store-only comp stacks up as one of the best in our history, and yet it happened at a time when American consumers are adopting digital shopping like never before,” Cornell told analysts in a conference call on Wednesday.
Channel numbers, however, “don’t tell the full story” for Target, he noted.
“They don’t measure the benefit of our work to position our stores as hubs at the center of our digital fulfillment. When you look beneath the surface of the reported numbers, you find that our stores actually drove more than 90% of our second-quarter growth, given that they enabled more than three-quarters of our digital sales and an even higher percentage of our digital growth,” Cornell explained. “Store-based fulfillment is uniquely suited to our business model because of the way it fits within our overall strategy. In particular, it aligns with our merchandising approach, which is based on curation both in our stores and online assortments. As a result, the majority of our digital demand is driven by items that are already available in our stores, which positions us to efficiently rely on those locations to fulfill the demand.”
Same-day services — Order Pick Up (in-store), Drive Up (curbside pickup) and Shipt (on-demand delivery) — posted 273% comp-sales growth in the second quarter and accounted for about 6% of overall comp-sales gains, Target reported.
“Among our store-enabled digital fulfillment options, we continue to see the most rapid growth in our same-day offerings: in-store pickup, Drive Up and Shipt. These services offer speed, reliability, convenience and value to our guests. Their digital capabilities are enhanced by human interaction, even though they are contactless. This explains why they generate some of the highest levels of satisfaction of anything we provide,” Cornell said. “Among these services, we saw the fastest growth in Drive Up, which grew an astonishing 734% [in the quarter]. We also saw incredible growth in Target sales fulfilled by Shipt, which were up more than 350%. However, even though we have offered pickup in all of our locations for more than five years, in-store pickup sales increased more than 60% in the quarter.”
On a comparable basis, Target saw increases of 4.6% in traffic and 18.8% in basket size in the second quarter. The company said that, through the fiscal 2020 first half, it has added 10 million new digital customers and garnered $5 billion in market share gains — topping its share growth for all of 2019.
“Across all five of our core merchandising categories, we delivered very strong share gains in the quarter, driven by the acceleration in our discretionary businesses combined with continued strength in our frequency categories,” Cornell said in the analyst call. “We mentioned in the first quarter that we’d already gained a year’s worth of market share in the quarter alone. Rather than slowing down, our share gains accelerated in the second quarter, and we gained double the dollars compared with the first quarter, bringing our year-to-date share gains to more than $5 billion.”
In the second quarter, comp-sales growth topped 30% in the home category, 70% in electronics and 20% in beauty. Apparel improved from a 20% comp-sales decline in the first quarter to double-digit growth in the second quarter, according to Target. The food/beverage and essentials categories also experienced robust comp-sales growth.
“Our less-discretionary food and beverage and essentials categories each saw second-quarter comp-sales growth of about 20%,” Cornell said. “For both categories, this was slightly slower than we saw in the first quarter, which was marked by dramatic stock-up shopping as the pandemic emerged.”
Target’s Good & Gather private brand, announced last August, has reached $1 billion in less than a year, the CEO added.
“This fall, we’ll roll out the third and final phase of our Good & Gather assortment, adding more than 600 items to bring the total number of items to nearly 2,000. The Good & Gather brand is clearly resonating with our guests and delivering on our food and beverage vision to enhance the Target experience by making it easy for families to discover the joy of food,” said Cornell.
“With the momentum from this new brand, our own-brand food and beverage business has been growing more than 30% so far this year, significantly outpacing the market and growing market share,” he added.
On the earnings front in the second quarter, Target posted net income of $1.69 billion, or $3.35 per diluted share, compared with $938 million, or $1.82 per diluted share, a year ago. Adjusted net earnings per share (EPS) were $3.38 (diluted) versus $1.82 in the prior-year period. Target said adjusted EPS in the 2020 quarter reflects $25 million in store damage and inventory losses from civil unrest and a $9 million investment gain.
Analysts, on average, had forecast Target’s second-quarter adjusted EPS at $1.62, with estimates ranging from $1.13 to $2.04, according to Refinitiv/Thomson Reuters.
“On the bottom line, our business generated second-quarter adjusted EPS of $3.38 and GAAP EPS of $3.35, both up more than 80% compared to last year,” Target Chief Financial Officer Michael Fiddelke told analysts. “Year to date, both of these measures have seen increases in the upper teens, stronger than we anticipated as we entered the year.”
Chief Operating Officer John Mulligan said in the call that Target has restarted openings of new stores after the COVID-19 outbreak forced those efforts to be postponed.
“After opening three new store locations in March, we took a pause in our new-store projects as uncertainty from the pandemic emerged,” Mulligan said. “Since then, we’ve been ramping up our new-store construction activity, and we are now on track to open up to 27 more stores this year. Nine of these new locations are slated to open this month, with another 16 to 18 expected in October. We continue to be pleased with the performance of our new small-format stores, and our pipeline is expected to support 35 to 40 of these new locations annually in future years.”
Target closed out the second quarter with 1,871 stores overall, compared with 1,853 a year earlier. Of its brick-and-mortar base, 1,505 stores are 50,000 to 169,999 square feet, 272 locations are 170,000 square feet or more, and 94 stores are 49,999 square feet or less.
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