Target Details Profit Hit as Shopping Patterns Swing in Pandemic

Target Corp. is seeing a slight decline in sales in its stores but an overall comparable sales boost as departments such as food and essentials—and especially online sales—soar in the midst of its fiscal first quarter.

The sales increase is coming at a cost, however, as increased food sales penetration brings down its margin to what one analyst called an “ugly mix,” and expenses associated with online fulfillment as well as store safety and employee compensation measures are also way up, the Minneapolis-based mass merchant said in a financial update this week.

Target in a previous update on March 25 detailed expenses of more than $300 million for increased operations and employee compensation. The company this week also said it was extending its $2-per-hour temporary wage increase until May 30.

Target’s first quarter began Feb. 2. Through April 22, total comps are up by 7%, reflecting a slight decline in stores and more than 100% growth in digital channels. Across core merchandise categories, comparable sales have grown more than 20% in essentials and food, more than 16% in hard lines, increased slightly in home goods and declined more than 20% in apparel and accessories.

Target noted wild swings in shopper behavior as the pandemic progressed from a surge in mid-March to a softening when shelter-in-place orders took effect, then a second increase beginning around April 15, which could be related to the issuance of federal stimulus payments to shoppers, analyst Chris Mandeville of Jefferies noted.

Month to date in April, comparable sales have increased more than 5% as store comparable sales have declined in the mid-teens, while digital comparable sales have increased by more than 275%. Across core categories, month-to-date comparable sales have grown more than 12% in both essentials and food, more than 30% in hard lines and in the high teens in home, while declining more than 40% in apparel and accessories.

While Target withdrew first-quarter earnings guidance on March 25, this week it provided additional detail on factors that will reduce its first-quarter profitability, including investments in pay and benefits, the shift in category mix toward lower-margin categories, the shift in channel mix, and inventory write-downs in apparel and accessories to reflect the rapid deceleration in sales trends. Together, these factors are expected to reduce the company's first-quarter operating margin rate by more than 0.5%.

“Over the last several years we have strengthened Target’s operational and financial model, investing in our unique, multi-category merchandise assortment, positioning our stores to fulfill every type of shopping, and supporting and developing our team. Throughout this crisis, the response of our business, and especially our team, are providing vivid evidence of the value of this model,” Michael Fiddelke, EVP and chief financial officer of Target, said in a statement. “While we expect our short-term profitability to be affected by COVID-19, we expect to have the financial capacity to emerge from this crisis in a position of strength. Having established an even stronger bond with our guests during this unprecedented time, we expect to have a compelling long-term opportunity to grow profitably and gain additional market share in the years ahead.”