The Minneapolis-based big-box retailer revealed quarterly earnings Wednesday before the market opened, improving on top and bottom lines thanks to strength in all categories, logging a $1.8 billion profit and announcing a $15 billion stock buyback plan.
“In the second quarter, our business generated continued growth on top of record increases a year ago, reinforcing Target’s leadership position in retail,” Brian Cornell, chairman and chief executive officer, said in a statement. “We’ve spent years building and investing in the durable model we have today, which is supported by a differentiated strategy and the best team in retail.
“Even after unprecedented growth over the last two years, we see much more opportunity ahead of us and we’re leaning into opportunities to invest in the long-term growth and resiliency of our business,” Cornell continued. “Our team and operating model can seamlessly adapt to changes in the environment and we’re well-positioned to deliver outstanding performance in the back half of the year.”
Total revenues for the three-month period ending July 31 were $25.1 billion, up from $22.9 billion the same time last year. Growth across the company was led by traffic, which was up 12.7 percent during the quarter. Comparable sales, also driven entirely by traffic, grew 8.9 percent, while store comparable sales increased 8.7 percent.
“Traffic accounted for more than 100 percent of our second-quarter growth, in contrast to a year ago when guests were limiting time out of their homes and the bulk of our growth was coming from bigger transactions,” Cornell told analysts on Wednesday morning’s conference call. “We continue to see a very optimistic consumer, certainly shopping with caution and they’re wearing masks more and more across the country, but we’re seeing tremendous resilience in the consumer today. And our traffic patterns, I think, represent that, as we see this consistent flow of traffic into our stores. So, a very resilient consumer. And we’re seeing that as we start the third quarter, traffic patterns and that resilience is continuing.”
But e-commerce and other online services also remained strong. Digital comparable sales rose 10 percent — on top of growth of 195 percent during 2020’s second quarter — and were led by same-day services: buy online, pick up in stores, drive-up and Target’s delivery service Shipt. As a whole, same-day services increased 55 percent during the quarter, year-over-year, with same-day services accounting for more than half of all digital sales. The highest growth was in drive-up services, which were up 80 percent in the last three months, on top of 700 percent growth the same time last year.
“To put it in dollar terms, over the last 2 years, second quarter sales through drive-up alone have increased by nearly $1.4 billion,” Cornell said on the call. “And for the spring season, they’ve expanded by double that amount.”
Christina Hennington, executive vice president and chief growth officer, at Target added that digital engagement drives more engagement in stores.
“When the guest starts in the digital experience, rather than the physical experience, there is much more understanding of who we are and they quickly are converting,” she said.
The company logged $1.8 billion in profits, up from $1.69 billion a year ago, as a result.
The retailer said back-to-school is off to a strong start, with demand for back-to-school products and college gear continuing in the current quarter. By category, apparel sales increased in the double-digit sales, with strength in swimwear, children’s and contemporary styles, followed by low double-digit growth in food and beverage and high single-digit growth in essentials and beauty.
“Last year there was a bigger need for household essentials and people were stocking up,” Hennington said. “Now we’re seeing less of that and we’re seeing more of the return to going out and therefore they’re wearing dresses and beauty products and luggage business has been very strong. So, there are patterns underneath. But the macro and aggregate is that Target is outpacing the industry, and it’s really led by a broad-based strength across all of our businesses.”
Meanwhile, the retailer continues to increase its apparel and beauty assortment, with a mix of its own brands and private labels. This week, Ulta Beauty at Target opened its first doors, 52 in total out of the planned 100. Target also opened 17 Apple shops-in-shop earlier this year and offers private label and national brands, such as Levi’s, Disney, Journelle, Thinx period panties and Priyanka Chopra’s hair care brand Anomaly, among others, both in stores and online.
“Target split the bullseye in Q2 with impressive results across the board, especially when considering they came on top of the potential ‘lightning strike’ performance of Q2 2020 and continue to reflect the significant leveraging of its store base, with over 95 percent of sales fulfilled in some fashion by its stores, confirming the soundness of its ongoing four-plus year investment program in its stores,” said Charlie O’Shea, Moody’s vice president. “Margins are holding steady despite an intensely competitive environment and the improvements in Target’s grocery segment, which carries lower margins and the stable of private brands continues to expand, which should portend well for improved margins going forward, especially with Ulta now in the mix.”
Still, investors weren’t satisfied. Shares of Target teetered back and forth between positive and negative during Wednesday’s trading session, closing down 2.85 percent to $247.40 apiece.
“Target’s Q2 [fiscal year] 2021 comps improved, [up] 8.9 percent [year-over-year], slightly ahead of the Street’s 8.8 percent [increase] estimate, but did miss Cowen’s elevated 10 percent [increase] estimate,” Oliver Chen, managing director and senior equity research analyst covering retail and luxury goods, wrote in a note. “Meanwhile, baskets declined, (3.4 percent), and slowed slightly to [an increase of] 15.4 percent on a 2-year basis, from [an increase of] 17.5 percent in 1Q.”
Other company headwinds include cost pressures, such as increased production and freight costs along the supply chain.
“In addition, our year-to-date income tax payments are more than $1 billion higher than at this time last year, given the volatility in our taxable income through the first half of last year,” said Michael Fiddelke, executive vice president and chief financial officer of Target.
Either way, the company is anticipating high single-digit comparable sales growth in the back half of the year and its full-year operating income margin rate to be 8 percent or higher. Earlier in the year, Target said it would invest $4 billion annually to grow its ecosystem.
Target also revealed Wednesday that its board has authorized a $15 billion share repurchase program, with repurchases under this program beginning after the 2019 program is complete.
“Our continued strong operating performance and ability to generate cash have supported meaningful investments in our team and our business, along with the return of capital through both dividends and share repurchases,” Fiddelke said. “This new authorization reflects our confidence in the sustained, strong performance of our business, which will enable continued share repurchases in keeping with our long-standing capital deployment goals.”
Target has 1,909 brick-and-mortar locations, opening 19 new stores so far this year and 12 more planned for the fall, in locations such as New York City, Hawaii and next to Disney World in Orlando, Fla. The retailer also opened two new flow centers during the quarter and is on track to complete roughly 140 store remodels this year.
The company ended the quarter with $7.3 billion in cash and cash equivalents and $11.5 billion in long-term debt.
Target’s stock is up more than 60 percent, year-over-year.
“Seeing growth on top of growth is nothing new,” Cornell told analysts. “Our business is already delivering consistent increases in sales and profitability in the years leading up to the pandemic. This was followed by a dramatic acceleration in 2020 and this year’s continued growth.
“Our theme for this quarter was growth on top of growth,” the CEO continued. “But you should expect that theme to continue going forward. We’re going to continue to invest in our stores. We’ll continue to invest in new, highly productive stores, invest in our brands, invest in our fulfillment services and invest in our team. And our focus on continuing to drive consistent growth and market share expansion quarter after quarter will be a theme you’ll hear for years to come.”