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What Happened in Target’s Blockbuster Q2

Target Corp.’s stores continue to play a key role in its digital business, fulfilling more than 90 percent of orders as same-day services helped power the mass merchant to eye-popping second-quarter results.

In a Nutshell: Target’s investments in digital, stores and merchandise mix laid the groundwork for the flexibility the company needed to shift gears amid consumers’ evolving shopping behaviors.

“Our second-quarter comparable sales growth of 24.3 percent is the strongest we have ever reported, which is a true testament to the resilience of our team and the durability of our business model,” said chairman and CEO Brian Cornell. “Our stores were the key to this unprecedented growth, with in-store comp sales growing 10.9 percent and stores enabling more than three-quarters of Target’s digital sales, which rose nearly 200 percent. We also generated outstanding profitability in the quarter, even as we made significant investments in pay and benefits for our team.”

In a conference call to Wall Street analysts on Wednesday, Cornell described the company’s results as “truly unprecedented,” and said adjusted earnings per share of $3.38 were “strong enough to offset the significant headwind as we saw in the first quarter.”

Cornell noted improved sales trends in apparel and in the overall channel mix at the end of the first quarter and how that has continued in the second quarter, describing it as “healthy growth across the board.” The robust comparable store sales growth at just under 11 percent is “one of the best in our history,” he added, “and it happened at a time when Americans adopted digital like never before.”

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Target’s curated merchandising approach was key to meeting much of the chain’s digital demand in the quarter, and items already inside its doors enabled the retailer to easily pull items from its stores to fill orders. Contactless services trended significantly higher in the quarter, with Drive Up growing 734 percent and Shipt up more than 350 percent. And while Target has offered Pick Up in all locations for the past five years, it saw the service increase by more than 60 percent in the quarter.

Looking ahead, Cornell said the company knows that consumers “still want to celebrate the seasons and holidays.” To help them do that, Target will be extending its back-to-school assortment options to account for uncertainty for the upcoming school year. For back-to-college, Target plans to move some items outside and highlight Drive Up and a wallet feature to offer contactless services like tap-and-go payments. For Halloween, Target will still offer costumes and decorations while pulling back on its candy assortment in anticipation of less door-to-door trick-or-treating. And for holiday, the chain will begin offering best-price holiday promotions as early as October in hopes of stimulating lasting demand throughout the season.

Target has made some big moves with new textile and apparel brands this year. In June, the discounter introduced Casaluna, a bedding, bath and fragrance line featuring textiles in hemp, silk and cashmere. The January launch of activewear line All in Motion, which offers “comfort, quality and value,” has surpassed internal expectations, getting a boost from demand for comfortable, casual clothing as a result of shelter-in-place restrictions.

“I’ve never been more confident in our differentiated strategy and in our long-term potential,” Cornell said.

While the second quarter has been less volatile than the first, vendors are still facing “capacity constrains” in some essential items, said chief operations officer John J. Mulligan. Target, he added, is negotiating with suppliers for higher allocations, though demand has outpaced supply. And because of near-term headwinds from uncertainty around Covid-19 and the upcoming U.S. presidential elections, chief financial officer Michael J. Fiddelke said Target will be mindful of its cash flow, although it will continue investing in customer-right inventory.

Net Sales: Total revenue for the quarter ended Aug. 1 rose 24.7 percent to $22.98 billion from $18.42 billion, which included a 24.8 percent increase in net sales to $22.70 billion from $18.18 billion.

Comparable sales were up 24.3 percent, the strongest Target has ever reported. On the retail front, comparable store sales rose 10.9 percent. Digital sales in the quarter grew 195 percent, which accounted for 13.4 percentage points of Target’s comparable sales growth. Seven-day and 90-day repeat purchases on digital were also higher than last year, executives said on the call.

“In the first half of the year, the company has gained approximately $5 billion in market share,” Target said.

The discounter said its stores fulfilled more than 90 percent of Target’s second quarter sales as same-day services such as Order Pick Up, Drive Up and Shipt grew 273 percent, and accounted for 6 percentage points of total company comparable sales growth.

For the six months, total revenue 18.1 percent to $42.59 billion from $36.05 billion, which included an 18.2 percent increase in net sales to $42.07 billion from $35.58 billion.

Earnings: Net income jumped 80.2 percent to $1.69 billion, or $3.35 a diluted share, from $938 million, or $1.82, in the year-ago quarter. On an adjusted basis, diluted earnings per share were $3.38.

Target’s second-quarter results surpassed Wall Street’s consensus expectations of adjusted diluted EPS of $1.62 on revenue of $20.09 billion.

For the six months, net income rose 13.9 percent to $1.97 billion, or $3.91 a diluted share, from $1.73 billion, or $3.35, in the same year-ago period.

CEO’s Take: “With our differentiated merchandising assortment, a comprehensive set of convenient fulfillment options, a strong balance sheet, and our deeply dedicated team, we are well-equipped to navigate the ongoing challenges of the pandemic, and continue to grow profitably in the years ahead,” Cornell said.