Higher Traffic, Private Brands Propel Solid Q2 for Target

It was a good quarter for food and beverage and owned-brand sales at Target, as the Minneapolis-based retailer posted year-over-year comp sales growth of 8.9% on traffic growth of 12.7%. 

For the second quarter that ended July 31, the food and beverage category saw growth in the low double digits, Target reported Aug. 18. That performance trailed only the apparel category, which also saw double-digit growth. "The food and beverage business has been a real source of strength for us and continues to do exceptionally well," Target Chief Growth Officer Christina Hennington said in the company's earnings call.

Apparel and food weren't Target's only winners, either: All five of Target's core categories saw sales climb against an exceptionally strong second quarter of 2020, when comp sales rose 24.3%.

Target's owned brands, which in grocery include the two-year-old Good & Gather label and the Favorite Day label that debuted in April, saw mid-teens sales growth. Owned-brand sales outperformed sales overall for the quarter, Hennington noted, adding that the company's expanding roster of private labels is a "huge part" of Target's strategic imperative.

Also boosting Target's food and beverage sales in the quarter was the addition of 5,000 more items, including more fresh produce and meal kits, available for pickup through the retailer's highly successful Drive Up and in-store pickup services. 

Same-day services (Drive Up, in-store pickup and delivery from stores via Shipt) now account for more than half of all digital sales, the company reported. Additionally, sales from same-day services in the second quarter climbed around 55% year over year, following 270% growth in 2020's second quarter. Drive Up once again was the engine fueling same-day sales growth, with that service—Target's highest-rated offering overall—posting sales growth of 80%.

Total revenue of $25.2 billion was up 9.5% year over year, and adjusted earnings per share of $3.64 represented 7.9% growth vs. the year-ago period. Target's board of directors also announced Aug. 18 a new, $15 billion share repurchase program. 

The company raised its expectations for the rest of fiscal 2021 slightly; Target CFO Michael Fiddelke said first-half sales have "consistently exceeded expectations," prompting the company to project comp sales growth in the high single digits for the second half of the year vs. its prior projection of merely single-digit growth.

Headwinds going into the fall include continued supply-chain pressures and a measure of uncertainty around the direction of the COVID-19 pandemic, given the dramatic recent surge in cases resulting from the spread of the delta variant. Inventory was up more than 20% in the second quarter, but "our guests are still seeing empty shelves on some occasions," Target COO John Mulligan said. Those stockouts result both from higher-than-anticipated demand and from vendors' own constraints in filling orders, he noted. Still, Mulligan said, early and strategic buying has Target "well-positioned" for the inventory demands of upcoming fall and winter holidays.

No significant changes in traffic patterns have been seen in recent weeks because of the surge in COVID cases, Target leaders told analysts and investors on the earnings call. Hennington said back-to-school and back-to-college sales are strong so far and that Target customers remain eager to shop.

"Even as they're mindful of ongoing risks, they're balancing caution with optimism," Hennington said. Target Chairman and CEO Brian Cornell echoed the assessment: "We continue to see a very optimistic consumer ... a very resilient consumer."  

Moreover, Hennington added, after 2020's upended holiday season, Target guests are looking toward the rest of the year "hungry to celebrate key holidays."

"Consumers have healthy balance sheets and remain eager to find safe ways to connect with their loved ones," she said.

Additional highlights for Target included the opening of 19 new stores, with 12 additional locations, including one adjacent to Walt Disney World in Orlando, Fla., set to open this fall. Two more sortation centers also will open this fall, Mulligan noted.