Target’s Q2 results show payoff of omnichannel investments

Target Corp. executives cited omnichannel efforts as a catalyst in the retailer’s strong fiscal 2019 second-quarter results, including earnings per share 20 cents above Wall Street’s forecast.

For the quarter ended Aug. 3, net income totaled $938 million, or $1.82 per diluted share, up from $799 million, or $1.49 per diluted share, a year earlier, Target said Wednesday. Adjusted EPS also was $1.82 for the 2019 quarter, compared with $1.47 in the prior-year period, which reflected a two cents-per-share income tax adjustment.

Analysts, on average, had projected second-quarter adjusted EPS of $1.62, with estimates ranging from a low of $1.57 to a high of $1.72, according to Refinitiv/Thomson Reuters.

“On the bottom line, our second-quarter profitability was well ahead of our expectations,” Chairman and CEO Brian Cornell (left) told analysts in a conference call on Wednesday. “Our business delivered double-digit growth in operating income, which translated into record high earnings-per-share numbers and more than 20% EPS growth over the last year.”

Fiscal 2019 second-quarter revenue came in at $18.42 billion, up 3.6% from $17.78 billion a year ago, reflecting gains of 3.4% in sales and 6.3% in other revenue. Comparable-sales grew 3.4%, combined with the contribution from non-mature stores. Digital comp sales surged 34% and contributed 1.8 percentage points to overall comp-sales growth, Target said. Operating income rose 16.9% to $1.32 billion from $1.13 billion in the 2018 quarter.

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“On the top line, our business delivered second-quarter comparable-sales growth of 3.4%, driven primarily by traffic. This growth was on top of unusually strong comp growth of 6.5% in the second quarter last year, meaning that our comp sales have increased about 10% since 2017, our best two-year stack performance in well over a decade,” Cornell said in the call.

“Among our sales channels, second-quarter comp sales grew 1.5% in our stores and 34% in our digital channels. Within our core merchandising categories, we saw more than a 5% comp growth in both apparel and essentials,” he explained. “This reflects the broad value we deliver across all of our categories and the balance we achieved between our more discretionary areas like apparel home and beauty and our less discretionary food and beverage and essential categories, which delivered consistent traffic throughout the year.”

Target completed 84 store remodels in the second quarter and is on track to finish about 300 this year, Cornell added.

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In late July, Target announced an expansion of Drive Up curbside pickup to more than 1,500 stores, which made the service available for the first time in Massachusetts, Rhode Island, Maine and New Hampshire. The previous month, Target made same-day delivery from its Shipt subsidiary available directly via the Target.com website.

“In our digital channels, we continue to see the most rapid growth in our same-day fulfillment options, in-store pickup Drive Up and Shipt, which together have more than doubled their sales in the last year,” Cornell said. “These options offer speed, convenience and reliability and, as a result, they are quickly becoming the preferred fulfillment choices for our guests. And most importantly, because these options leverage our store infrastructure technology and teams, same-day fulfillment delivers outstanding financial performance as well.”

Target provides Order Pickup service at all of its 1,851 stores. The company aims to have Drive Up available at most of its stores by the end of 2019. Shipt same-day delivery is now available through more than 1,500 stores in over 250 markets.

Chief Operating Officer John Mulligan said Target’s top- and bottom-line results in the quarter “provided further evidence of the payback we're realizing” on investments in an omnichannel operational model.

“One place where it's easy to see the impact of our new model is in digital fulfillment, where the mix is moving dramatically towards our same-day services, in-store pickup Drive Up and Shipt,” Mulligan said in the call. “In the second quarter, these three services accounted for more than one-third of our digital sales, up from about 20% last year. In other words, our same-day options are growing much faster than our digital sales. Specifically, combined sales for in-store pickup Drive-Up and Shipt have more than doubled over the last year, accounting for nearly three-fourths of Target's 34% digital comp in the second quarter.

“That means that nearly 1.5 percentage points of the company's overall comp growth was driven by our same-day services. These are remarkable statistics, and they demonstrate how rapidly our guests are learning about and embracing these new convenient options,” he noted. “For many guests, they are becoming the go-to choice for their digital shopping because they offer unique advantages.”

With the strong quarterly performance, Minneapolis-based Target raised its full-year guidance to GAAP and adjusted EPS (continuing operations) of $5.90 to $6.20, compared with its previous outlook of $5.75 to $6.05.

Before Target’s earnings report, Wall Street’s consensus forecast was for adjusted EPS of $5.93, with projections running from a low of  $5.76 to a high of $6.05, according to Refinitiv/Thomson Reuters.