Target Q2: how the business is winning in-store and online

Stewart Samuel
Program Director - Canada
@RetailAnalysis

Date : 19 August 2020

We review Target’s second quarter performance and how it’s adapting to the COVID-19 pandemic.

Q2 key numbers

  • Total revenue increased 24.7% to $23.0bn, with comparable sales up 24.3%
  • Comparable store sales were up 10.9% while digital comp sales increased 195%
  • Net earnings increased 80.3% to $1.7bn

Target’s unique fulfillment model

What stands out for me in these results is that while customers consolidated their trips, traffic continued to grow at Target. It delivered store comp sales growth of over 10% at a time when it hit record-high digital sales. Both parts of the business are running hard, but using its stores as distribution hubs and the roll-out of its Drive Up service, ensures that its stores are well positioned to support incremental trips driven by digital sales. The retailer’s most recent data indicates that a multichannel shopper spend four times as much as a store-only customer, and 10 times as much as a digital only shopper.

The growth in digital has also enabled it to reduce the average unit costs for digital fulfillment by around 30% year-on-year. This has been driven by new tools and processes, an increase in same-day orders (which are less costly than ship-to-home) and fixed cost leverage. This includes picking multiple orders and delivering multiple orders at a time within its car parks. With 10m new digital customers gained this year, the prospects for the business are strong. The focus now is on retaining and engaging them to be loyal Target shoppers.

However, challenges do exist. Securing product supply is one of the priorities as demand remains elevated in many categories. With much of its non-food offer sourced internationally with long lead times, the business is having to work closely with its suppliers, ensuring that it can act quickly as demand changes. One of my favourite quotes from the analyst call came from John Mulligan, Target’s chief operating officer,

“And we know when we write down a forecast, the only thing we know is that it is wrong."

Source: Target

Digital sales growth driven by same-day services

Comparable sales growth of 24.3% is the strongest the company has ever reported, highlighting the impact of COVID-19 on the business. Over half of this was driven by the retailer’s digital operations as sales increased almost 200%. During the quarter, Target saw the strongest growth for its Drive Up service, up more than 700%, while sales fulfilled by its same-day on-demand service, Shipt, increased more than 350%. Around 90% of all online orders were fulfilled by store level inventory, reflecting the robustness of its business model. The retailer will see a further benefit as it continues with the roll-out of grocery items as part of its store pickup services.

Good & Gather private label hits $1bn

In line with other retailers, Target saw trips being consolidated. While traffic was up 4.6%, basket size increased 18.8%. Growth was strong across all its major categories, led by electronics, up more than 70%, and home, up more than 30%. Products in high demand included home office items, video games and kitchenware. Sales in food and beverage increase around 20%, helping its new food private label, Good & Gather, to hit $1bn sales less than a year since being introduced. A further 600 lines will be added to the range in Q3, supporting the 30% growth it has experienced in its private label food and beverage business this year.

Flexible seasonal plans

As shoppers continue to adapt their behaviours in response to the pandemic, Target is building flexibility into to its plans, especially around seasonal events. It is featuring its back-to-school ranges for an extended period this year, enabling parents to delay their shopping as school districts finalise their plans. In college areas, in-store shopping events are being moved outside into store car parks. For Halloween, it is deepening its assortment of costumes and home décor, anticipating more at-home events this year. It is expecting demand for confectionery to be restrained this year. It will also spread its holiday deals over a longer time-frame to help control traffic to its stores and support social distancing requirements.

The trading environment remains highly complex. Uncertainty around the pandemic, the scope for further government stimulus and an up-coming election ensure a high range of dynamics that the business needs to work though as it heads into a key trading period.

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