Target is proving there are few winners in the fight against the coronavirus

The Minneapolis-based big-box retailer posted quarterly earnings early Wednesday morning, improving on revenues, but falling short on profits thanks to significant declines in higher-margin items like apparel and accessories and additional costs associated with the company’s e-commerce business. 

“It goes without saying but this quarter was unlike anything we have seen in our company’s long history.” Brian Cornell, Target’s chairman and chief executive officer, said on Wednesday morning’s conference call with analysts. “Unprecedented volatility within the quarter presented the most extreme test of our business and operations that I could have imagined.”

With stores open during March and April, total comparable sales grew 10.8 percent. But many of those sales were concentrated in lower-margin categories like food and beverage and essentials, while apparel was down about 20 percent. Meanwhile, Target’s comparable digital sales surged 141 percent during the quarter as consumers — many afraid to leave home amid the coronavirus pandemic — stocked up on food and essentials by way of the Internet. 

But the company’s rapid surge in online orders proved to be expensive with increased labor costs, digital merchandising and supply chain fees. In late March, the company increased hourly wages by $2, now through June. Target also added extra cleaning measures to keep stores safe and offered extended same-day delivery services and curbside pickups for the surge in online orders. The decline in demand for apparel also meant extra inventory impairment charges. 

For the three-month period ending May 2, total revenues were $19.3 billion, up from $17.4 billion the same time last year. Income fell to $284 million, compared with $795 million a year earlier, a decline of more than 64 percent. 

“Throughout the first quarter, our team and guests faced unprecedented challenges arising from the spread of COVID-19,” Cornell said in a statement.

“One thing that seems most certain is continued volatility,” he added on the call. “And whenever possible, we’re building flexibility into our plans and commitments. But let me be clear, the expectation of continued volatility in the external environment doesn’t translate to a lack of confidence about our future. It’s at times like these that we can all see the benefits of a strong balance sheet and fundamentally sound business model.”

The company’s stock, which is up more than 70 percent year-over-year, fell about 2 percent during Wednesday’s trading session.

“The key is whether some of the margin pressures from Q1 will continue into Q2, specifically markdown pressure,” Seth Sigman, an analyst at Credit Suisse, wrote in a note. “Beyond that, Target seems well-positioned to benefit from competitor struggles and the disruption that may continue to face retail in the coming quarters.”

Not surprisingly, during the quarter, products that made staying at home a little easier — including video games, kitchenware and board games — over performed. Apparel was down through March and early April, with the exception of Target’s All In Motion activewear collection, which was strong throughout.

The company is not providing guidance for the second quarter or full year. But Cornell said there are several bright spots. For one, in-store traffic began to pick up again by mid-April, even as online traffic continued to surge across all categories — even apparel. In fact, Internet traffic was up between 200 and 300 percent year-over-year in the last two weeks of the month.

“Over the last couple of weeks of April, we saw some of the strongest comparable sales growth we’ve experienced in our history,” Cornell told analysts. “On an average day in April, our operations were fulfilling many more items and orders than last year’s Cyber Monday, a day for which we had planned months ahead at the time.”

Stores helped fulfill about 80 percent of online orders, Cornell said.

“Even more impressive was in our April digital sales growth of just over $1.1 billion, compared with [the same time] last year,” the ceo continued. “Store fulfillment accounted for more than $950 million of that growth, as both our same-day services and shipments to guest homes saw significant increases.”

He added that during the first quarter, more than 5 million people shopped on for the first time while more than 2 million people used the retailer’s drive-up service for the first time. Target’s drive-up service grew 1000 percent during the month of April.

John Mulligan, chief operating officer and executive vice president of Target, added that while online and drive-through services do incur additional expenses up front, they add long-term value to shoppers and increase brand loyalty. 

“The economics of a digital transaction, as I have said before, are so much bigger than just the single transaction,” Mulligan said. ”When we see guests engage with more of our fulfillment choices, they become stronger customers of Target and we build relevance with them in total. And that’s where the economics of digital get most powerful. When we see a guest use drive-up [service] for the first time, they spend more at Target in total — and even more in store than they did previously.”

Target has 1,900 stores nationwide, in addition to its e-commerce business. 

In the last three years, Target has spent about $4 billion to remodel stores. So far, the endeavor has resulted in sales increases between 2 and 4 percent at remodeled locations.

But in late March, amid the coronavirus outbreak in North America, Target edited its ambitious plans to just 130 remodels in 2020, down from the roughly 300 previously planned. The new plan meant remodels already in the works could be finished. The others would be moved to 2021. 

The company also adjusted the number of new, smaller format store openings down to about 15 to 20 this year, compared with the previously anticipated 36 stores. For now, Target said it would also shelve its plans to add fresh groceries and adult beverages in the drive-up locations. 

Still, on the call, Cornell stressed how “vitally important” Target’s stores will continue to be in the future, even as the company continues to expand its omnichannel capabilities. Moreover, he added, that as consumer shopping habits continue to change, Target is well-positioned to take even more market share. 

“For several years now, we have been talking about this movement toward consolidation in the industry,” Cornell said. “Unfortunately due to the pandemic, I think we’re going to see an acceleration in that bifurcation. And I think it’s going to only accelerate the opportunities that companies like Target will have to consolidate market share and continue to grow profitably in this environment. 

“Today’s consumer is looking to make fewer stops,” Cornell continued. “And the ability to come to Target and pick up their food and beverage needs, their household essentials, their beauty products, their home, apparel items and their household essentials in hard lines each and every week, makes us an attractive choice in a consolidating environment.”