Target Q2: Traffic Jumps, Apparel Heat Up, Home Cools Off, Freight Fees Won’t Quit
In a Nutshell: It was a very good quarter for Target as the retailer bested Wall Street’s consensus estimates, with both topline and bottomline increases.
“We’ve been investing for years to build the durable model that’s in place today,” Brian Cornell, chairman and CEO, told Wall Street analysts during a conference call Wednesday.
While store traffic “accounted for more than 100 percent of our second quarter growth,” Cornell said digital “continues to be led by our same-day services, in-store pickup, drive-up and ship, which together grew 55 percent this year, on top of more than 270 percent last year.”
“Among those same-day options, drive-up has quickly grown to be the largest, accounting for more sales than pick-up and ship combined,” he added. Over the past two years, Q2 drive-up sales alone jumped nearly $1.4 billion, he said, noting that for the spring season, it expanded by double that amount.
Though the back-to-school season is off to a “really strong start,” Cornell noted the likelihood that the second half will “continue to be volatile, particularly in light of the ongoing uncertainty surrounding the Delta variant.”
John Mulligan, chief operating officer, reiterated Target’s investments in robotics, machine learning and artificial intelligence. “Based on our results so far, and our expectations for the back half of the year, our business is positioned to deliver more than $100 billion in sales this year, representing growth of 45 percent or more compared with five years ago,” he said.
In-store stocks have improved from last year, though some shelves are still empty, the effect of supply chain delays and outperforming products. In addition to working with vendors to secure more goods, Mulligan said Target has been successful in addressing the supply chain bottlenecks by “expedit[ing] ordering and [buying] larger upfront quantities in advance of a season, mitigating the risk that replenishment could take longer than usual.”
Charlie O’Shea, retail analyst at Moody’s Investors Service, said Target continue to reflect the “significant leverage of its store base, with over 95 percent of sales fulfilled in some fashion by its stores, confirming the soundness of its ongoing four-plus year investment program in its stores.”
Jefferies retail analyst Stephanie Wissink added that while freight costs softened gross margins, Target showed broad-based strength, with all five major merchandise categories reflecting year-over-year growth.
And Telsey Advisory Group’s Joe Feldman said Target “remains well positioned to gain market share,” supported by the retailer’s ongoing strategies ranging from private rands, small format stores and fulfillment-supply chain enhancements.
Net Sales: For the quarter ended July 31, total revenue rose 10 percent to $25.16 billion from $22.98 billion. Included in total revenue was a net sales gain of 9.5 percent to $24.83 billion from $22.70 billion. Comparable sales growth in the quarter was 8.9 percent, on top of the 24.3 percent gain in the year-ago quarter. Digital sales dipped slightly to 17 percent from 17.2 percent last year. While that reflected the shift back to stores, it was still well over double the 7.3 percent reported in second quarter 2019. Same-store sales rose 8.7 percent, while comparable digital sales grew 10 percent in the period.
The second quarter gross margin rate was 30.4 percent versus 30.9 percent a year ago, reflecting pressure from higher merchandise and freight costs. “These pressures were partially offset by the benefit of low markdowns, favorable category mix, and a shift in fulfillment mix into lower-cost same-day fulfillment options,” it said.
Christina Hennington, chief growth officer, said second quarter results were “strongest” in apparel, delivering mid-teens growth on top of low-double digit growth last year. “Within apparel, swim, kids and young contemporary all delivered comps in the low 20 percent range,” she said. In contrast, comparable growth in home moderated as expected—Target saw the category grow in the low single digit, versus an over 30 percent gain last year—as sales slowed in kitchen storage and decor.
Looking ahead, Hennington said Target will launch four designer partnerships next month in apparel: Nili Lotan, Rachel Comi, Sandy Liang and Victor Glemaud. For home, there’s a new Opalhouse eclectic vibe from long-time partner and Jungalow founder Justina Blakeney, which rolled out at Target stores in June. And for kids and babies, illustrator and author Christian Robinson on Sunday launched a limited edition collection that included home goods, apparel and books.
Target added a new functionality on its app to meet “Promo FOMO based on “hearing from our guests that fear of missing out on a deal is real,” she said. When customers add items to their cart, the app will automatically show them all the applicable Target Circle—Target’s loyalty program—offers before they check out.
For the six months, total revenue rose 16 percent to $49.36 billion from $42.59 billion.
Earnings: Net income rose 8 percent to $1.82 billion, or $3.65 a diluted share, from $1.69 billion, or $3.35, in the year-ago period. On an adjusted basis, diluted earnings per share (EPS) was $3.64.
Wall Street was expecting adjusted diluted earnings per share (EPS) of $3.49 on revenue of $25.08 billion.
For the second half of 2021, Target expects high single digit growth in comparable sales, near the high end of the previous guidance range. The full-year operating income margin rate is expected at 8 percent or higher.
For the six months, total income jumped 98 percent to $3.91 billion, or $7.82 a diluted share, from $1.97 billion, or $3.91, a year ago.
CEO’s Take: “Even after unprecedented growth over the last two years, we see much more opportunity ahead of us, and we’re leaning into opportunities to invest in the long-term growth and resiliency of our business. Our team and operating model can seamlessly adapt to changes in the environment, and we’re well-positioned to deliver outstanding performance in the back half of the year,” Cornell said.