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Target’s Apparel Sales Picked Up Late in Q1 Amid Strong Same-Day Demand

Target’s first-quarter digital business jumped 141 percent as consumers flocked to e-commerce, and shoppers are starting to rediscover discretionary purchases like apparel.

In a Nutshell: Digital was the clear winner in the first quarter for Target, which leveraged brick-and-mortar inventory to fulfill 80 percent of its digital comparable sales, accounting for more than $950 million in digital sales growth. Plus, 95 percent of these omnichannel orders were ready to be picked up or shipped on time. And of the millions of guests who used Drive Up, 40 percent were new to the service, the retailer said.

In total, same-day services jumped 278 percent in the quarter, and its Shipt service doubled its shopper community across the country, sales fulfilled by the delivery business, acquired in December 2017 for $550 million, up more than 300 percent. Earlier this month, the mass merchant said it is in the process of acquiring the now-defunct last-mile startup Deliv‘s proprietary technology to help with the logistics of batching and routing orders.

“On an average day in April, we fulfilled more items and orders than last year’s Cyber Monday,” Target said.

Chairman and CEO Brian C. Cornell described Q1 as “unlike anything we’ve seen in the company’s history.”

Strategic changes and investments in recent years to bolster omnichannel and digital helped the company quickly adapt to the changing environment. “It’s in times like this that we can see the benefit of a strong balance sheet and a fundamentally sound business model,” Cornell said Wednesday during Target’s first-quarter Wall Street earnings call.

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Those investments and overall flexibility helped the company adjust to the sudden spike in digital demand, and serve customers with its trio of rapidly growing same-day services, he said.

Cornell also described how consumer behavior has shifted in a matter of weeks. In February, sales in the first three weeks followed a normal pattern before store traffic accelerated in the final week. By mid-March, consumers were stockpiling food, drinks and the household essentials necessary for hunkering down indoors. Discretionary categories such as apparel and accessories suffered as a result, though home goods saw high-single-digit comp growth in the quarter. By mid-April as some restrictions eased, Target saw a “rapid increase in traffic and store sales,” Cornell said, adding that a broad surge in discretionary spending perked up apparel sales in the “last two weeks of April.”

And “more than 5 million shopped at Target for the first time in the quarter,” Cornell added.

The company slowed down store investments to reconfigure construction plans in light of social distancing requirements, John J. Mulligan, executive vice president and chief operating officer, said on the call. While the situation is still evolving and it’s too soon to lay out longer term models, Target plans to pivot its real estate footprint towards “new productive small formats in neighborhoods that couldn’t be served” when it was launching larger doors, Mulligan said.

Net Sales: Total revenue for the quarter ended May 2 rose 11.3 percent to $19.62 billion from $17.63 billion, which included a corresponding 11.3 percent gain in net sales to $19.37 billion from $17.40 billion. Total comparable sales rose 10.8 percent, which included a comparable digital sales growth of 141 percent. Target said the average basket was up 12.5 percent as customers made fewer, bigger shopping trips. Same-store sales in the quarter inched up 0.9 percent.

Operating income was down 58.7 percent to $468 million from $1.14 billion in 2019. The gross margin rate was 25.1 percent versus 29.6 percent in the year-ago quarter, reflecting costs and inventory impairments related to the rapid slowdown in apparel and accessories sales and other category mixes as consumers stocked up on lower-margin consumables in food and beverage. Target said it also encountered higher digital and supply-chain costs due to strong digital volume and investments in staff wages and benefits. The discounter said it committed to $500 million of extended benefits for its staff, along with safety measures for both workers and guests.

Earnings: Net income fell 64.3 percent to $284 million, or 56 cents diluted share, from $795 million, or $1.53, a year ago. On an adjusted basis, earnings per share were 59 cents.

Wall Street was expecting adjusted diluted EPS of 68 cents on revenue of $19.0 billion.

Target withdrew its first-quarter and full-year guidance on March 25.

CEO’s Take: “With the stores at the center of our strategy, and a significant investment in the safety of our team and guests, our operations had the agility and flexibility needed to meet the changing needs of our business,” Cornell said. “With the dedication of our team, the benefit of a sustainable business model and a strong balance sheet, we are confident Target will emerge from this crisis an even stronger retailer, with higher affinity and trust from our guests.”