Target sees lift from digital sales in Q3

Digital sales, led by same-day pickup delivery orders, helped fuel continued comparable sales growth at Target Corp. in its fiscal 2019 third quarter.

Also on Wednesday, Target reported earnings per share well above Wall Street’s consensus forecast, exceeding the high end of analyst estimates for the discount store chain.

For the quarter ended Nov. 2, Minneapolis-based Target totaled revenue of $18.67 billion, up 4.7% from $17.82 billion a year earlier, reflecting sales growth of 4.7% and an 8.8% gain in other revenue. Comparable sales rose 4.5% year over year, combined with the contribution from non-mature stores.

“We are really pleased with our third-quarter financial results, which were well ahead of our expectations on nearly every measure,” Target Chairman and CEO Brian Cornell (left) told analysts in a conference call on Wednesday. “Comparable sales grew 4.5% in the quarter, about one point ahead of our guidance, driven by an acceleration of sales in our stores. This comp performance is on top of 5.1% in last year's third quarter, meaning that we've grown our comparable sales nearly 10% over the last two years.”

Comparable digital sales climbed 31% in the quarter, adding 1.7 percentage points to overall comp sales growth, according to Target. 

Related:Target and Shipt make same-day delivery easier

“When we analyze the components of our comp sales, we're pleased that traffic continues to be the primary driver of our growth. Overall, our traffic grew 3.1% in the third quarter, as our guests chose shop with us more often both in stores and through our digital options. Among our sales channels, store comps were up 2.8% in the quarter, more than a percentage point faster than the second quarter, while digital comps grew 31% and drove 1.7 percentage points of the company's comp growth,” Cornell explained.

“Notably, this year's digital growth was on top of a 49% comp increase last year. And while these numbers add up to 80%, when you're talking about growth rates of this magnitude, the power of compounding really matters,” he said. “Specifically, when you do the math, you'll see that our third-quarter digital comp sales have actually grown more than 95% over the last two years.”

Same-day fulfillment options — in-store pickup, Drive Up and Shipt — accounted for 80% of the growth in digital sales, Cornell pointed out. Target offers Drive-Up curbside pickup service at more than 1,750 stores in all 50 U.S. states, along with free order pickup is all stores, with most orders ready within an hour. Shipt delivery for Target.com orders is offered at more than 1,500 stores across 48 states, and most orders are ready within an hour.

Related:Target unveils new private label brand

“Given that these same-day options rely on our store assets, team and inventory, they are much more profitable than traditional e-commerce fulfillment,” said Cornell.

Operating income came in at just over $1 billion in third quarter, an increase of 22.3% from $819 million a year ago. Target said the gross margin rate was 29.8%, up from 28.7 percent in the prior-year period, reflecting a benefit from merchandising efforts to optimize costs, pricing, promotions and assortment, combined with a favorable category sales mix.

“Among our frequency categories, we continue to benefit from amazing strength in beauty and cosmetics, which delivered high-single-digit comp growth in the quarter. We also saw high-single-digit growth in our over-the-counter assortment and mid-single-digit growth in household essentials and paper products,” Cornell said in the call. “Within our hardline categories, we saw particular strength in mobile and continued growth in toys, offset by comp sales declines in electronics and entertainment. And finally in food and beverage categories, we saw a low-single-digit comp increase led by double-digit growth in adult beverages, along with strength in non-alcohol beverages and in our bakery and deli areas.”

So far, Target has seen a good customer response to new flagship brand Good & Gather, according to Cornell. Launched at stores in September, Good & Gather will become the retailer’s largest food and beverage brand, eventually replacing existing labels Archer Farms and Simply Balanced and some product offerings under the Market Pantry brand.

“The idea behind the brand is simple: great food made for real life. Good & Gather incorporates simple, high-quality ingredients, without any artificial flavors, synthetic colors, artificial sweeteners or high-fructose corn syrups,” he said. “We saw encouraging results from our launch of 650 items during the quarter and expect that Good & Gather will become our largest owned brand, once we roll out the full 2,000-item assortment by the end of next year.”

At the bottom line in the third quarter, Target posted net earnings of $714 million, or $1.39 per diluted share, compared with $622 million, or $1.17 per diluted share, a year ago. The company reported adjusted net earnings per share (EPS) from continuing operations of $1.36, reflecting a 1-cent-per-share impact from an insurance recovery related to its 2013 data breach.

On average, analysts projected adjusted EPS of $1.19, with estimates ranging from a low of $1.13 to a high of $1.27, according to Refinitiv/Thomson Reuters.

For the fourth quarter, Target forecasts comp sales growth of 3% to 4%. GAAP EPS from continuing operations is pegged at $1.55 to $1.75, with adjusted EPS of $1.54 to $1.74.

“In light of this performance and our updated expectations for the fourth quarter, we raised the midpoint of our full year adjusted EPS expectations by 30 cents,” Cornell said in the analyst call. “This reflects really strong performance well ahead of our expectations going into 2019. And it demonstrates the power of the durable, operational and financial model we've been developing over the last several years.”

Target now expects full-year fiscal 2019 GAAP EPS from continuing operations of $6.27 to $6.47. Adjusted EPS is projected at $6.25 to $6.45, compared with the previous guidance of $5.90 to $6.20.

Analysts’ consensus estimate is for adjusted EPS of $6.18, with projections running from $6.05 to $6.40, according to Refinitiv/Thomson Reuters.

During the third quarter, Target remodeled 153 stores, and the retailer has completed nearly 300 remodels for the year to date. As of Nov. 2, the company operated 1,862 stores versus 1,844 a year ago.