The big-box retailer revealed quarterly results Wednesday morning, improving on top-line revenues, while logging more than $1 billion in profits. And while digital comparable sales grew 155 percent during the quarter, year-over-year, comparable traffic grew about 4.5 percent for the quarter, with more than 95 percent of the company’s third-quarter sales fulfilled by stores.
“Our strong results in 2020 reflect the benefits of our multiyear 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. As a result, we’ve seen a deepening level of engagement and trust from our guests,” Brian Cornell, chairman and chief executive officer of Target, said in a statement. “The result is unprecedented market share gains and historically strong sales growth, both in our stores and our digital channels.”
For the three-month period ending Oct. 31, revenues grew 21.3 percent to $22.6 billion, up from 18.6 billion in 2019’s third quarter. As a result, the Minneapolis-based company logged more than $1 billion in profits, compared with $706 million the same time last year.
Target’s stock, which closed up 2.34 percent to $166.85 a share Wednesday, is up more than 50 percent year-over-year.
“In Q3, we saw growth in every aspect of our business, driven by the temporal role of our stores,” Cornell said on a media call with reporters Tuesday evening. “The key to our growth this year and sustaining momentum over time is the trust our team has built with consumers throughout the pandemic, as they consolidate trips and routinely choose our stores.”
The ceo pointed out that while shoppers took fewer trips to stores overall during the quarter while quarantining at home, consumers continued to go to Target stores (an average of more than 30 million shoppers a week) and spent more money while in them. The average Target basket size grew 15.6 percent, year-over-year.
“It’s been encouraging to see the guests coming back to us, each and every week, quarter by quarter, during the pandemic,” Cornell said on the call. “The fact that we’re sitting here today, in our third quarter with store comps — physical store comps up close to 10 percent — to me is a real sign that our guests have placed their trust in Target, that the investments that we’ve made in safety and our team are being recognized and [that] they’re rewarding us, even during the pandemic, with more and more trips to our stores. And certainly, taking advantage of our ease and convenience of our offerings.”
That includes same-day services — such as buy-online-pick-up-in-store, drive-up services and Shipt, Target’s delivery system — all of which grew during the quarter, with the highest returns in drive-up, up more than 500 percent. Target also benefited from fewer promotional activities and clearance items throughout the quarter.
Target, which has nearly 1,900 stores nationwide, in addition to the e-commerce site target.com, has also opened 29 new small-format Target stores year-to-date. For the holidays, Cornell said Target will continue to invest in safety, such as contactless safety options in stores and pre-shopping trip reservations for increased social distancing, as consumers begin the shopping season earlier. The retailer also plans to be closed on Thanksgiving Day, but instead will offer more frequent holiday deals throughout the season as it faces off against Walmart and Amazon.
“Past and continuing strategic investments are paying off in a big way, which combined with Target’s superior execution, resulted in significantly improved operating margin, which in turn generated a [year-to-date] operating income increase of over $1.2 billion, more than making up for Q1’s softness,” Charlie O’Shea, Moody’s Investors Service retail analyst for Target, wrote in a note. “With already fierce competition likely to increase, Target has built up sufficient margin cushion such that it can absorb the meaningful levels of promotions which will be necessary to compete effectively with the likes of Walmart and Amazon.”
Among the headwinds pressuring gross margins were increased costs for digital fulfillment and lower margin categories growing faster than higher-margin categories during the quarter.
Meanwhile, all categories grew during the quarter, with the highest growth in electronics and home goods, increasing more than 50 percent and in the mid-20s percentage range, respectively, year-over-year. But even as consumers continue to work from home, apparel, a high-margin category, as well as beauty, grew, up 10 percent and high teens, respectively.
“We certainly saw strength in intimates and sleep, certainly those loungewear categories,” Cornell said on the call. “But we have seen very strong performance in kids. We’re very pleased with our performance in men’s during the quarter. So, apparel has been one of our strengths. And certainly from a market-share standpoint, one of the real highlights from our business throughout the quarter. And we certainly see that continuing as we finish up the year.
“To be really clear, our focus will always be on curation and making sure we balance the right mix of our own brand and select national brand partners and that will be an approach we’ll take for years to come,” Cornell told analysts during Wednesday morning’s call. “So, we’re very excited about some of our new partnerships and working now with Levi’s. And next year, in 2021, welcoming Ulta Beauty to our stores and to target.com. But we’ll always be curators and find the right mix for our guests between our own brands and iconic national brands.
“Strong growth in our beauty business was a precursor to a long-term strategic partnership we announced last week with Ulta Beauty,” Cornell continued, referring to the retailer’s plans to open 100 Ulta Beauty shops-in-shop in Target and on target.com in the second half of 2021. “Beauty is ideally suited to our store strategy, because it embodies both style and frequency. Ulta Beauty will help us build on our success, providing our guests access to dozens of new beauty brands nationwide, with elevated service and presentation in select locations.”
Target ended the quarter with $5.9 million in cash and equivalents and $12.4 billion in long-term debt and borrowing. The company is not providing forward-looking guidance.
“Looking ahead to next year, the crystal ball doesn’t get any clearer. Not only is it uncertain when the coronavirus will be fully behind us, it’s also unclear how the consumer will behave in a post-COVID-19 world,” Michael Fiddelke, chief financial officer and executive vice president at Target, said on Wednesday’s conference call. “That creates uncertainty about the path of multiple categories, as you consider how the mix of consumer spending will evolve and what the competitive landscape will look like.
“But that doesn’t mean we can’t affect the outcome,” Fiddelke continued. “We continue to prioritize flexibility as we plan our business and focus on agility in our operations. That way, when the unexpected happens, our team can respond quickly and effectively.”