How Target’s Q3 performance sets it up for the holidays

Date : 20 November 2019

We look at Target’s strong third quarter performance and how it plans to win this holiday season.

Top-line results

Target’s third quarter revenue increased by 4.7% to $18.7bn, with comparable store sales up 4.5%. Comparable digital sales increased 31%. Operating income increased 22.3% to $1.0bn, with the stronger than expected increase in profitability driven by an improved gross margin. These results provide the retailer with a strong foundation heading into the key holiday trading period. They also underline the strength of the business across multiple fronts. It saw stronger traffic in its stores, a solid performance in ecommerce and balance across its portfolio with both style and essential categories performing well. Target expects comparable sales growth of 3-4% in the fourth quarter. Several key initiatives will play into this as outlined below.

Source: IGD Research

Same-day delivery driving ecommerce

The continued strong growth in ecommerce builds on an increase of 49% in Q3 last year, resulting in growth of around 80% over a two-year period. Critical to this has been the development of a suite of fulfillment options. In the latest quarter, around 80% of the growth was driven by same-day delivery options, including in-store Pick Up, Drive Up and Shipt. These are profitable models for Target as they optimise its existing store network. Ahead of the holidays, the retailer has completed the national roll-out of its Drive Up programme, while its Shipt same-day delivery programme has been incorporated into the Target app.

Solid start with new food brand

The retailer has made a solid start with the launch of its new food brand, Good & Gather. It has been encouraged by the initial launch of 650 products. Target anticipates that by the end of next year, when the full range of 2,000 products is live, it will be its largest private label offer. With private label food penetration in the low teens, there is significant headroom to grow the range.

Disney collaboration driving in-store engagement

During the quarter, Target also launched 25 Disney stores within selected locations. These have been designed to create an immersive experience and offer an enhanced range of products. Success with this partnership could open the door to similar executions with other branded partners. The retailer will expand the collaboration to 40 additional locations in 2020.

Target Circle up to 35m members

Following its launch last month, Target’s new loyalty programme, Target Circle, has grown to 35m members. The retailer anticipates that this will support its performance in the fourth quarter. During an 18-month test phase, members shopped more frequently at Target, with spend levels 2-5% higher than non-members.

New stores operating model

Target has also completed the roll-out of a new store operating model. A central element of this is the creation of dedicated department teams in key areas, including food and beverage, beauty and electronics. This has delivered improved efficiency internally and a better experience for customers. The retailer is also developing a new inventory planning system which will help to lower backroom inventory levels and deliver improved on-shelf availability. The system is currently active on 15% of the range, representing 20-30% of the replenishment that flows to its stores.

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