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Target Wields Stores as Weapons in Driving Explosive Q3 Sales

Target’s store-as-hub strategy helped it remain flexible and agile as it adapts to changing consumer shopping patterns in the third quarter as the world continues to face coronavirus pandemic surges.

In a Nutshell: In a call Wednesday, CEO Brian Cornell said customer trends drove huge gains in both sales and profits.

Target’s strategy of using stores as hubs for e-commerce fulfillment enhanced performance in the quarter, with 75 percent of Q3 digital sales fulfilled by brick and mortar.

While sales in the quarter reflected a slow back-to-school start, sales picked up in September with comps growth in the mid-20s, settling into the 20 percent range for October. Apparel comps in the quarter grew 10 percent, powered by intimates, sleepwear and men’s apparel. Target also expanded the merchandise categories offered through same-day-delivery service Shipt to include” kids and adult apparel,” Cornell said.

Contactless is playing a bigger role in stores, he added. Consumers don’t have to touch a hand scanner to make payments while associates don’t need to scan a customer’s phone for pick up order. Target will also deploy a meter tracker on its website to help customers gauge store traffic, and provide an option to reserve a spot in line for checkout.

In January, the last month of the fourth quarter, Target plans to showcase new offerings for seamless T-shirts, fleece and performance bottoms to celebrate the first anniversary of its All In Motion activewear line.

Cornell, who said customers have indicated that they plan on small gatherings at home to celebrate the holidays and plan to shop for gifts throughout December, mentioned plans to add Ulta Beauty shop-in-shops in select stores next year. The Target Plus network encompasses more than 175 vendor partners providing close to 400,000 stock keeping units. In an average week, the retailers sees “well over 35 million [customers] shopping at our stores,” Cornell said.

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John Mulligan, executive vice president and chief operating officer, said Target is testing a sortation concept that would move sorting and staging out of the store to provide more back space in the store for fulfillment. Drive Up saw $700 million in growth for the quarter, with Shipt increasing 280 percent to $200 million in sales, he added. Half of all Pick Up orders are filled within two hours, with two-thirds finished within four hours.

Net Sales: Total revenues for the quarter ended Oct. 31 rose 21.3 percent to $22.63 billion from $18.67 billion, which included a 21.3 percent increase in net sales to $22.33 billion from $18.41 billion. The company said comparable sales grew 20.7 percent in the period, reflecting comparable store sales growth of 9.9 percent and digital sales growth of 155 percent.

The company said comparable traffic grew 4.5 percent for the quarter, with an average ticket that grew 15.6 percent. In addition, same-day services—Order Pick Up, Drive Up, Shipt—grew 217 percent.

The gross margin rate was 30.6 percent, versus 29.8 percent in 2019, driven by “exceptionally low markdown rates, partially offset by the impact of higher digital fulfillment and supply chain costs, along with unfavorable category mix,” Target said. Operating income margin rate was 8.5 percent, compared with 5.4 percent last year.

Operating income for the quarter reached $1.9 billion, up 93.1 percent from $1.0 billion year over year.

For the nine months, total revenues climbed 19.2 percent to $65.22 billion from $54.71 billion, which included a net sales gain of 19.3 percent to $64.40 billion from nearly $54 billion in the year-ago period.

Earnings: Net income jumped 41.9 percent to $1.01 billion, or $2.01 a diluted share, from $714 million, or $1.39, in the year ago quarter. On an adjusted basis, diluted earnings per share were $2.79 for the quarter.

Wall Street was expecting earnings of $1.60 on revenues of $20.93 billion.

For the nine months, net income rose 22.1 percent to $2.99 billion , or $5.91 a diluted share, from $2.45 billion, or $4.74, in the year-ago period.

Target declined to provide guidance.

CEO’s Take: “Our strong results in 2020 reflect the benefits of our multi-year effort to build a durable and flexible model, with a differentiated assortment and a suite of industry-leading fulfillment options—all brought to life through the passion and effort of our team. As a result, we’ve seen a deepening level of engagement and trust from our guests. The result is unprecedented market share gains and historically strong sales growth, both in our stores and our digital channels,” Cornell said. “In preparation for the holiday season, we focused first on the safety of our guests and our team, making changes to eliminate crowds while enhancing our fast-growing, contactless options like in-store pickup, Drive Up and Shipt.”