Target gets Q1 boost with help from Drive Up

Strong digital sales, driven by same-day fulfillment services, boosted first-quarter results at Target Corp. as the company beat Wall Street’s earnings-per-share estimate by a dime.

Target said Wednesday that for the fiscal 2019 first quarter ended May 4, sales rose 5.1% to $17.4 billion from $16.56 billion a year earlier. Same-store sales grew 4.8% year over year, fueled by a 4.3% increase in comparable traffic, according to the Minneapolis-based retailer.

Comparable digital sales jumped 42% and contributed 2.1 percentage points to comp-sales growth, Target said. The company noted that same-day fulfillment — including Order Pickup (in-store pickup), Drive Up (curbside pickup) and Shipt (home delivery) — drove more than half of its digital sales growth for the quarter.

Operating income came in at nearly $1.14 billion, up 9% from $1.04 billion a year ago.

Brian Cornell

Photo: Target

“In the first quarter, comparable sales growth of 4.8% was a bit ahead of our expectations,” Chairman and CEO Brian Cornell told analysts in a conference call on Wednesday. “This was driven by brand strength across all our merchandising categories, particularly in toys and baby. We also saw strength across channels in the first quarter. Store comparable sales were up 2.7%, while comp digital sales were up 42%, adding 2.1 percentage points to company's comp growth.”

Related:Target expands Drive Up locations

Cornell noted that the period marked Target’s eighth straight quarter of comparable-store gains.

“We’re seeing a really positive guest response to our same-day digital fulfillment services, which drove well over half of our digital sales growth in the quarter,” he said. “Our ability to offer the same-day services, which deliver a high level of satisfaction, is a result of our strategy to put stores the center of fulfillment. In fact, our stores handled more than 80% of our first-quarter digital volume, including all of our same-day options combined with digital orders shipped directly from stores to guest homes.”

At the bottom line, reported net income in the first quarter totaled $795 million, or $1.53 per diluted share, compared with $718 million, or $1.34 per diluted share, in the prior-year period. Adjusted EPS (diluted) also was $1.53, up from $1.32 in the 2018 quarter.

Analysts, on average, projected adjusted EPS of $1.43, with estimates ranging from a low of $1.35 to a high of $1.52, according to Refinitiv/Thomson Reuters.

In the earnings call, Cornell cited operational benefits from Target’s strategy to position its stores as e-commerce hubs.

Related:Target executive tapped as new CEO of Shipt

“As we move digital fulfillment from upstream DCs to stores, we see a significant reduction in expense, and we talked about a 40% reduction. When we go from an upstream DC to some of our same-day fulfillment offerings like Order Pickup and Drive Up, we see a 90% reduction in costs,” he explained. “Those were the fastest-growing parts of our digital fulfillment during the quarter, and we expect that to continue. It's clearly where we're seeing the guest preference.”

Order Pickup has been available for nearly five years but saw “a tremendous amount of growth,” along with “dramatic acceleration in the Drive Up offering and very strong performance from Shipt,” Cornell noted. “So as that continues to mature and grow, we're going to see some of the benefits flow through our P&L.”

Target provides Order Pickup at all of its 1,851 stores and the Drive Up curbside service at 1,250 locations. The company aims to have Drive Up available at most of its stores by the end of 2019. Shipt same-day delivery is currently available through more than 1,500 stores in over 250 markets.

“In dense urban areas, where we're building small-format stores, we offer a service in which guests who shop in-store can ask us to hold their basket at checkout and deliver to their front door later that same day in a time window of their choosing. For this service, we charge a flat fee of $7 with no annual fee, and our guests love it,” Chief Operating Officer John Mulligan told analysts during the call. “Once we solve the problem of carrying the order home, it frees them up to shop more, a lot more. Average basket size on these orders is more than five times bigger than the average for these locations, and they include a very strong mix of items from our home category.”

Using stores as digital hubs increases the speed and decreases the cost of fulfillment, and services like Drive Up and Shipt are generating incremental trips for Target “rather than simply replacing other forms of shopping,” Mulligan noted, adding that first-quarter digital sales from in-store pickup climbed over 80% and sales via Drive Up and Shipt grew faster.

“Despite the success we're already seeing, we continue to hear questions about the long-term viability of keeping our stores at the center of fulfillment. Our answer is empathic: We are confident that this is the best long-term solution for Target. But I also want to emphasize that this is already a highly effective strategy today,” he said. “Digital accounted for more than $5 billion of Target sales last year, and our stores fulfilled about two-thirds of that volume. This year, given our digital growth trajectory and the rapid adoption of our same-day services, we are on track to grow Target's digital sales by more than $1 billion in 2019 and fulfilling even higher percentages of this volume from our stores.”

On the brick-and-mortar side, Target saw a net gain of seven stores — all 49,999 square feet or less — to 1,851 for the 2019 first quarter. The company said it plans to finish 1,000 remodels by the end of next year.

“Our property teams continue to rapidly transform our store network. The team completed another 53 remodels across the country in the first quarter, and they're on track to deliver approximately 300 remodels this year. Guests continue to respond to these projects by shopping the remodel stores more often, driving incremental traffic and sales,” Cornell said. “And finally, our team opened seven small formats across the country in the first quarter, allowing Target to serve new neighborhoods in metro areas like New York, Los Angeles, Chicago and Washington, D.C., and new markets like Santa Barbara, Calif.”

For the full fiscal year, Target forecasts low- to mid-single-digit growth in comparable sales and GAAP and adjusted EPS of $5.75 to $6.05. Wall Street’s consensus estimate is for adjusted EPS of $5.83, with projections running from $5.51 to $6.05, according to Refinitiv/Thomson Reuters.