Same-Day Services Fuel Big Q3 for Target

Both traffic and average ticket rose for Target in the third quarter, with surging digital sales helping push total comp sales up 20.7% year over year.

Digital comp sales were up 155% in the quarter vs. third-quarter 2019, the company announced Nov. 18. That growth comes in large part from strong demand for Target's Drive Up and in-store pickup services, both of which get high satisfaction marks from customers, executives said in a conference call.

Drive Up sales alone were up 500% year over year, Target Chief Operating Officer John Mulligan said. Drive Up's acceleration, he added, didn't ding in-store pickup sales, which grew by 50%.

Total revenue of $22.6 billion was up more than 21% vs. a year ago, and operating income was up 93% from third-quarter 2019 to $1.9 billion.

Overall, Target's comparable traffic increased 4.5%, and average ticket increased 15.4% in the quarter. Executives praised the flexibility of local teams to meet shifting order-fulfillment demands and noted that Target stores fulfilled 95% of third-quarter sales. Heading into the peak holiday season, at least 50% of each store's team is trained to be able to handle digital-order fulfillment, Mulligan noted.

"We are ready for an unprecedented amount of digital volume," Mulligan said. On the inventory front, Target started the quarter down 3% from the year prior but ended up 11%, he said. Despite persistent inventory shortages in a few categories, such as paper goods, the company expects to see continued progress on inventory levels in the current quarter.

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Expanding the number of Target stores that offer fresh, refrigerated and frozen foods for same-day pickup—and expanding the mix of these items available for pickup—has been and will continue to be a leading priority, company executives told investors. Currently, about 1,600 of Target's approximately 1,900 U.S. locations offer fresh and frozen foods for in-store or Drive Up pickup.

Mulligan noted that two-thirds of customers who order fresh/refrigerated/frozen foods online for pickup make their Target run within four hours—indicating that "guests are using this service to fulfill an urgent need," he said. Mulligan and Target CEO Brian Cornell flagged the company's strong brand connection with young families: "[That connection] is so fundamental to our strategy," Cornell said. Target can help meet a demand for convenient and contactless order and pickup of a wide variety of items, they said. Customers who have turned to Target to order diapers and other nonfood items online for pickup have wondered why they shouldn't be able to get a gallon of milk or a dozen eggs at the same time, Mulligan said. Now, increasingly, they can, he added.

Financial guidance for 2021 is suspended as continued uncertainty looms for the year ahead, executives said. Not only the course of the COVID-19 pandemic but also how consumer behavior will change post-pandemic remain to be seen, they stipulated, but Target is bullish on the opening of more small-format stores and investments in sorting centers that will still allow the company to maintain its stores-as-hubs fulfillment model. This year has been Target's biggest to date for small-format store openings, and more than 30 small-format store openings are anticipated for 2021, he said.