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Same-Day Service Sends Sales Up at Target

After beating Wall Street’s earnings per share estimate by 20 cents, and upping guidance for the full year, Target Corp. could continue to be one of U.S. retail’s top performers with a long runway ahead of it.

In a Nutshell: Target is doing well, and the company’s chairman and chief executive officer Brian Cornell knows it. “Because of our outstanding performance in the first half of the year and our confidence moving forward, we are increasing our guidance for full-year earnings per share,” he said.

In the conference call to Wall Street investors Wednesday morning, Cornell said within the “core merchandising categories, we saw more than a 5 percent comp growth in both apparel and essentials.”

Looking ahead, Cornell said the company is “encouraged that many items originally slated for tariff increases in September have now been delayed until later this year.” While he acknowledged that the fluidity of the trade situation can present a layer of uncertainty in planning the discounter’s business, the CEO said Target expects to continue to “benefit from our diverse multi-category assortment, deep expertise in global sourcing and a sophisticated set of manufacturing partners around the world. As a result, we are confident in our ability to navigate this period of heightened volatility and move our business forward.”

The mass discounter also noted that its same-day fulfillment services–order pick up, drive up and Shipt options–accounted for nearly 1.5 percent points of the retailer’s overall comparable sales growth for the quarter. Sales via these services more than doubled over the last year, and drove nearly three-quarters of the retailer’s 34 percent digital comp.

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According to Target in a blog post, “We fulfilled nearly five million Drive Up orders in the first half of this year, more than double the amount in all of 2018.” And the retailer noted that same-day is also “bringing in new guests online, with nearly one in five guests who placed a same-day order in the second quarter were placing a digital order with Target for the first time.” Comp traffic in the quarter was up 2.4 percent.

During the conference call, John Mulligan, chief operating officer, said the same-day services are becoming the go-to choice for digital shoppers. “They are convenient. Guests can choose where they receive their order, either at the front of the store, in the parking lot or at home….And finally, these services provide certainty. Guests don’t have to wonder when a package will arrive at their house and what will happen to the package if they are not at home. And of course, it eliminates the need to deal with opening and recycling a stack of cardboard boxes each week,” he said.

Charlie O’Shea, vice president and analyst at credit ratings firm Moody’s Investors Service, said the initiatives Target noted in February 2017 proves that “short-term pain can generate long-term gains if the strategy is well executed.” He foresees continued acceleration on key measurable metrics of Target’s business. “Going forward, we expect Target to continue to be one of the top performers in U.S. retail, and we note that the runway will likely be longer and wider with food now being repositioned, which will drive traffic and provide more opportunities to sell higher margin private and exclusive product.”

Target on Monday said Good & Gather, its new private label food and beverage brand, will be available in stores and online on for same-day delivery starting Sept. 15. The new brand over time–more than 2,000 products from dairy to produce, ready-made pastas and meats to sparkling water by the end of 2020–will replace the discounter’s existing Archer Farms and Simply Balanced brands. Target said the new brand launch will build on the retailer’s investments to “enhance in-store presentation and assortment, increase product reliability and expand fulfillment options, such as same-day deliver.”

Joseph Feldman, analyst at Telsey Advisory Group, said that transformation initiatives such as price investment in everyday items and differentiating merchandise with new private brands  are resonating with consumers. “Target also stands to gain from ongoing industry consolidation,” the analyst said.

Michael Lasser, analyst at UBS, said, “Bar none, we think this was one of the most well-rounded quarters that Target has reported in some time, with strength up and down its [profit and loss statement].”

Net Sales: Total revenues for the quarter ended Aug. 3 rose 3.6 percent to $18.42 billion from $17.78 billion. Included in the tally was a corresponding 3.6 percent uptick in sales to $18.18 billion. Comparable sales grew 3.4 percent, which included a 34 percent increase in comparable digital sales and a 1.5 percent increase in comparable-store sales. The discounter noted that comparable sales have grown “approximately 10 percent over the last two years,” adding that the two-year comp performance was the best “in well over a decade.”

The discounter said the gross margin rate was 30.6 percent, slightly higher than the 30.3 percent rate a year ago. Target said the improvement was due to merchandising efforts to “optimize costs, pricing, promotions and assortment, combined with the benefit of favorable category sales mix.” However, the discounter acknowledged that benefit was partially offset by higher digital fulfillment and supply chain costs. Operating income for the three months was $1.32 billion, representing a gain of 16.9 percent from the year-ago period.

Earnings: Net income rose 17.4 percent to $938 million, or $1.82 a diluted share, from $799 million, or $1.49, in the year-ago quarter.

Wall Street was expecting $1.62 on revenues of $18.34 billion.

For the third quarter, Target said it expects comparable sales growth to be 3.4 percent, on an EPS range of $1.04 to $1.24.

For full year 2019, Target raised EPS guidance to between $5.90 to $6.20, above prior guidance of $5.75 to $6.05.

CEO’s Take: Cornell said, “By appealing to shoppers through a compelling assortment, a suite of convenience-driven fulfillment options, competitive prices and an enjoyable shopping experience, we’re increasing Target’s relevancy and deepening the relationship between our guests and our brand.”