Retail

Target Q3 Earnings Show Continued Momentum For Digital-First Strategy

Target store

Target continued its winning digital-first strategy for the third quarter as the company announced another triple-digit eCommerce spike on its earnings call Wednesday (Nov. 18). By the digital numbers the company rode its “store as a fulfillment center” model to a 155 percent growth rate over 2019. This included a 217 percent bump from Shipt, the company’s delivery service for online orders. More than 95 percent of Target’s third-quarter sales were fulfilled by its stores.

To put the company’s digital performance in perspective, its third-quarter digital sales grew more than $2 billion. That’s more than the company’s entire eCommerce take for 2014. Between that time and Q3 2020 Target’s digital commerce business has grown at a 45 percent annual rate.

“The question we hear most often is whether we’ll continue to have enough capacity for our digital fulfillment,” said CFO Michael Fiddelke on the earnings call. “And in that regard the primary factor is our strategic decision to place our stores as the center of fulfillment by relying on the same asset to fulfill both our conventional, and digital sales. The key to fulfillment capacity is the store asset itself.”

It is a strategy that many of Target’s competitors have copied, including Amazon and Walmart.

Both CEO Brian Cornell and Fiddelke addressed the company’s prospects for the holiday season. Target has aggressively promoted holiday shopping since early October through Black Friday-style events and other promotions. When asked on the call if he had a sense of consumer spending at this point into the season, Cornell, like Doug McMillon at Walmart, pointed to the emotional need for consumers to have a gift-filled holiday, but he avoided any other specifics. Fiddelke’s take on the holiday season was a bit more detailed.

“There has been a significant change in the mix of consumer spending as a meaningful portion is shifted away from travel and multiple forms of out of home entertainment and into many of the categories we sell,” he said on the earnings call. “We also continue to benefit from trip consolidation, as consumers have increasingly relied on our stores and digital services to satisfy a wide variety of their wants and needs.”

Fiddelke pointed to several dynamics that could determine Target’s take of consumer holiday spend. The first is the expected change in the category mix for Q4 toward electronics and toys. To that end the company has partnered with FAO Schwartz to expand its toy inventory selection and gain an additional high-profile footprint at its New York City flagship store. Fiddelke was unsure at this point of the exact percentage of the digital mix given the in-person nature of holiday retailing and the dramatic jump in digital sales.

To summarize Target’s financial numbers, in addition to the aforementioned digital increases, trip consolidation grew the average ticket size by 15.6 percent. The company’s total comparable sales grew 20.7 percent, reflecting comparable stores growth of 9.9 percent and an additional 10 percent from digital sales. Total revenue of $22.6 billion grew 21.3 percent compared with last year. Operating income was $1.9 billion in third quarter 2020, up 93.1 percent from $1.0 billion in 2019.

“Our strong results in 2020 reflect the benefits of our multi-year effort to build a durable and flexible model, with a differentiated assortment and a suite of industry-leading fulfillment options — all brought to life through the passion and effort of our team,” said Cornell. “As a result, we’ve seen a deepening level of engagement and trust from our guests. The result is unprecedented market share gains and historically strong sales growth, both in our stores and our digital channels.”

Cornell continued, “In preparation for the holiday season, we focused first on the safety of our guests and our team, making changes to eliminate crowds while enhancing our fast-growing, contactless options like in-store pickup, Drive Up and Shipt. In a holiday season that will feel different for our guests, we’re committed to helping them navigate the season safely, as they find new ways to celebrate with family and friends.”

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