Target Posts Strongest Quarter of Comp Sales Growth Amid 'Elevated' Volatility

Target shares reached a 52-week high Wednesday as the stock closed 12.7% higher at $154.22 after its strongest-ever quarter of same-store sales growth. Q2 comparable sales jumped 24.3% for the quarter ended Aug. 1. Stores fulfilled more than 90% of sales in the quarter, said CEO Brian Cornell. The retailer had market share gains of $5 billion in the first half, with “unusually strong” gains across all five core categories. Cornell credited a differentiated merchandising assortment and convenient fulfillment options, on a Wednesday earnings call.

Same-day services, including order pickup, drive up and Shipt, grew 273%, accounting for 6 points of comp sales growth. Store comps rose 10.9%, while digital comp sales surged 195%, comprising 13.4 points of total comp sales growth. Drive-up fulfillment grew fastest at 734%. To meet demand, Target is adding extra drive-up slots sooner than expected, from two to 12 additional parking lot spots, depending on stores’ needs, said Chief Operating Officer John Mulligan.

Electronics sales shot up 70% due to increased shopping in office equipment, home electronics and gaming, said Cornell. Despite solid Q2 performance, Target is being cautious and “flexible” about back-to-school (BTS) and holiday season plans, he said. It announced plans to close on Thanksgiving for social distancing and safety, and to begin holiday promotions in October, he said. “We're going to make some big changes,” Cornell said of the “extended” holiday shopping season, which will have a “different rhythm.” He emphasized shopping ease, convenience, safety and value.

Target is extending BTS because 60% of students are learning remotely, and it’s not clear whether they will return to classrooms this fall or in January, Cornell said. At some point those students will need school supplies, he said, “so we’ve made the decision to be flexible." Target’s inventory is “leaner than we want it to be” -- some 3% lower than a year ago -- against a year-to-date sales increase of more than 18%, said Chief Financial Officer Michael Fiddelke. At the end of Q2, “we'd have preferred to have less cash and more inventory.”

Vendors continue to face capacity constraints due to unexpectedly high demand, said Mulligan. They continue to ramp up production, and Target negotiated higher allocations, but demand in stores “continues to outpace supply,” he said: “As a result, on-shelf availability in many of these categories continues to look sparse.”

Despite strong Q2 results, volatility continues to be “elevated,” said Fiddelke. May was “by far the strongest month” with 33% comp growth, followed by June at 21%, and July at about 20%, he said. August month-to-date comp sales have been running in the low double digits, strong historically but an “incredibly wide swing within a few months,” he said. That’s an indicator of how difficult it is to forecast in the current climate, said Fiddelke: “Given that our Q1 performance was not a good predictor of our second quarter results, our Q2 results should not be viewed as a predictor of our performance going forward.” He didn’t provide Q3 or full-year guidance.

Following the unrest after the George Floyd killing, Target closed or cut operating hours in hundreds of stores nationwide. Most stores reopened within days; all but two have reopened, with those slated to open by year-end, Cornell said. Target put new store openings on pause in March but resumed construction, with plans to open 27 more stores this year. Nine are scheduled to open this month, 16-18 in October, said Mulligan.