Traffic Drives (Another) Big Quarter for Target

Still-rising traffic was the biggest factor driving comp sales up 12.7% for Target Corp. in the third quarter of fiscal 2021, the Minneapolis-based retailer reported Wednesday. 

Transactions rose 12.9% in the quarter that ended Oct. 30, Target CFO Michael Fiddelke noted in a call with investors and analysts, after climbing 4.5% in the year-ago quarter. Higher traffic offset a slight decline in basket size—down 0.2%—vs. one year ago. 

Net sales stood at $25.7 billion for the quarter, a 13.3% increase from a year ago, while gross margin rate shrank to 28% in this year's third quarter from 30.6% in the third quarter of 2020, reflecting "pressure from higher merchandise and freight costs, increased inventory shrink, and increased supply-chain costs from increased compensation and headcount in the company's distribution centers," Target reported in its earnings statement.

On those inventory and supply-chain notes, how are things looking for the 1,900-store retailer heading into the holiday season? Outages remain in certain categories, Target COO John Mulligan said, but he added, "We feel confident in our inventory position."

Target Chairman and CEO Brian Cornell acknowledged on the earnings call intensifying supply-chain pressures in the third quarter but said the company's early buying, early anticipation of higher delays and demand, and effective collaboration across Target teams and supply-chain networks have prepared the company to stand up an "exceptionally strong" holiday season. "With a strong inventory position heading into the peak of the holiday season, our team and our business are ready to serve our guests and poised to deliver continued, strong growth, through the holiday season and beyond," Cornell said in the company's earnings statement.

Both sales and traffic accelerated from the second quarter of 2021, too, when Target recorded comps growth of 8.9% and an expansion in transactions of 12.7%. Breaking down Target's third-quarter sales growth by channel, store comp sales climbed 9.7%, while digital comp sales rose 29%. (By comparison, Walmart, which reported third-quarter earnings Tuesday, saw e-commerce comps rise 8%, transactions climb 5.7% and basket size increase 3.3% in the quarter ending Oct. 29.)

All five of Target's core categories saw double-digit sales growth in the quarter, helping drive share gains, with food and beverage one of three categories seeing sales growth in the mid-teens, Target Chief Growth Officer Christina Hennington reported. Fresh and frozen foods as well as snacks and candy were the biggest winners in F&B, Hennington said. 

"Our guests are looking to us to provide joy" at the holidays and throughout the year, said Hennington, adding that "joy, ease, value, inclusivity" are the ingredients helping Target deliver on its promise of providing what COO Mulligan called a "differentiated and outstanding shopping experience." 

CEO Cornell spoke to a similar theme, emphasizing that the company aims to provide "ease, reliability, safety and value" in every shopping trip. The level of guest engagement that Target is now seeing is "far beyond what many would have imagined a few years ago," he said.

That focus on the anytime, anywhere ease of the shopping experience is something Target continues to play up heavily this holiday season as it looks to build on quarter after quarter of double- or triple-digit growth for its same-day services. Investments in the workforce, including the hiring of an additional 100,000 team members for the holidays and beyond, help create a better guest experience and brought down hourly turnover vs. 2019 levels, Mulligan said. Notably, digital fulfillment—Target fulfills more than 95% of online orders from its stores—had a neutral impact on margin, Fiddelke added.

During the third quarter, Target opened 15 new stores, ranging in size from 11,000 to 160,000 square feet, bringing the company's total to 30 stores opened for the year. Additionally, two distribution centers have opened this year, and two more sortation centers are set to open in the fourth quarter, Mulligan said.

GAAP EPS of $3.04, the company reported, was up 51.6% from $2.01 in the year-ago quarter. Third-quarter adjusted EPS of $3.03 represented an 8.7% increase from $2.79 in 2020.

Target raised its fourth-quarter sales expectations, now projecting high-single-digit to low-double-digit comps, up from previous high-single-digit guidance. It maintained its expectation of a full-year operating income margin rate of 8% or higher.