Target Reports ‘Explosive Demand for Dresses and Cosmetics’
The flexibility and convenience of Target's same-day delivery services continue to resonate with customers.
Target CEO Brian Cornell credited the mass merchant’s first-quarter earnings and revenue beats to consumers’ “enthusiastic return” to “in-store shopping.” Apparel sales, especially Target’s popular private labels, surged in Q1, reflecting the economy recovery emerging nationwide.
Target continued to fire on all cylinders in the quarter, beating Wall Street’s consensus expectations on both earnings per share and revenue. Following last year’s growth in digital sales and same-day fulfillment for purchases retrieved in stores or at curbside, Cornell said the lines are blurring between sales that originate in store versus online, especially given that “more than three-quarters of our first-quarter digital sales were filled by our stores.” With consumers beginning to resume their social schedules, Target has seen “an incredible rebound in apparel sales, with Q1 comp growth of more than 60 percent,” he added. By comparison, pandemic staples like beverages that outperformed a year are now trending lower, Cornell said, underscoring consumers’ new spending priorities. If there’s one option that stands out, however, it’s in-store pickup, Cornell said, which “consistently receives the highest ratings of anything we do.” It now accounts for north of 30 percent of digitals, up from just 5 percent two years ago, he added, noting that all same-day fulfillment options continue to outpace “overall digital.” Target has broadened the scope of products available through drive-up fulfillment, earmarking investment funds to enhance this option even further, Cornell said. “A year ago, in terms of category performance, we saw the strongest growth in our apparel business, which delivered comp growth in the low 60 percent range,” Christina Hennington, executive vice president and chief growth officer, said. First-quarter apparel sales grew 29 percent over the past two years, versus last year’s 1-percent-down comps, she said. “Home also delivered incredible growth, with an increase in the 30 percent range on top of a high single digit increase a year ago. Growth was strong across the board, with the most robust performance in our decorative home and seasonal businesses,” she added.
Target’s private brands “grew approximately 36 percent in the first quarter,” Hennington said, “the strong increase we’ve ever recorded.” She credited the retailer’s “unique capabilities and product design, development, and sourcing” for the owned brands’ “unbeatable combination of design, quality and value.” “These brands aren’t something that our guests pick up while they’re at Target,” Hennington “They’re a big reason why they shop at Target, which is why we continue to invest in them.” Though shoppers focused on home, activewear, and beauty and wellness products while socially distancing last year, now “they’re flocking to our stores” as they gear up to reenter social activities, Hennington said. Customers “tell us they want to maintain some of the new habits and routines they formed during the pandemic,” she added, noting their priorities around home, health and family. But now consumers are driving “explosive demand for dresses and cosmetics, as well as luggage and categories based on being active, like sporting goods and performance outerwear,” she said. John Mulligan, chief operating officer, reported supply chain enhancements including four new regional distribution centers coming online through 2022, with two buildings, one in Chicago and the other in New Jersey, slated to open later this year. Once they operate at scale, these facilities will “meaningfully shorten lead times to nearby stores, improving in-stock levels while reducing the need for safety stock in those locations,” he said. After positive initial results from a new Minneapolis sortation center, Mulligan said plans to build up to five more in 2021, with additional openings for 2022 and beyond. Smaller than the average store, the centers are in markets with a higher concentration of local package delivery, he said. Target is planning to add 30 new stores across the country in urban and dense suburban markets, Mulligan said. Formats near college campuses are about less than 50,000 square feet, while real estate condition in dense suburban markets provide opportunities for bigger stores, between 50,000 to 100,000 square feet—locations that weren’t available in the past, he added.
Net Sales: For the three months ended May 1, total revenue rose 23.4 percent to $24.20 billion from $19.62 billion, including a 23.3 percent gain in net sales to $23.88 billion from $19.37 billion in the year-ago period. Comparable sales jumped 22.9 percent, reflecting comparable store sales growth of 18.0 percent and comparable digital sales growth of 50 percent. Cornell said this marked the fourth consecutive quarter in which comps grew by more than 20 percent.
Operating income margins were 9.8 percent versus 2.4 percent in the same 2020 quarter. The gross margin rate was 30.0 percent, above the 25.1 percent reached in the 2020 period. “This year’s gross margin rate reflected the benefit of favorable category mix and merchandising actions, primarily from low markdown rates, while last year’s gross margin rate reflected elevated inventory costs and impairment charges,” Target said.
Earnings: Net income was $2.10 billion, or $4.17 a diluted share, compared with net income of 284 million, or 56 cents, in the same year-ago quarter. The adjusted diluted earnings per share was $3.69. Wall Street was expecting adjusted diluted EPS of $2.25 on revenue of $21.81 billion. For the second quarter, the company forecasted mid-to-high single digit growth in comparable sales. For the year, Target said it expects positive single-digit comparable sales growth in the last two quarters of the years.
CEO’s Take: “Given the trust we’ve built with our guests quarter after quarter and our commitment to adjusting along with them to the ongoing shifts in the macro environment, we’re confident in continued comp growth in the second quarter and through the remainder of the year, as well as a healthy full-year operating margin rate,” Cornell said.