Target's Q3 Sales Surged 21% on Soaring Demand for Electronics; Q4 Uncertain

Target executives credited “flexibility” and “agility” for a 20.7% year-on-year hike in comparable sales vs. Q3 2019. Stores had a 9.9% year-on-year comparable sales bump; digital comps spiked 155%, they said on a Wednesday investor call. Sales through same-day services -- order pickup, drive up and Shipt -- soared 217% year on year.

Revenue in the quarter grew 21.3% to $22.6 billion, said the company; stores’ share was $18 billion, said CEO Brian Cornell. Three-quarters of online orders picked up by or shipped to customers were fulfilled by stores, which fulfilled more than 95% of total Q3 sales. The number of transactions grew 4.5% vs. 3.1% in Q3 2019; average ticket grew 15.6% vs. 1.4%.

Cornell cited “sharply higher” sales gains in hardlines with comp growth in the mid-30% range, led by electronics, up 50% year on year. He highlighted strength in computer software, video games, portable electronics and office equipment.

Inventory shortfalls persist amid “huge swings in pace of sales” in some categories, said Chief Operating Officer John Mulligan. Employees are playing “catch-up” in long-lead categories such as electronics, home and apparel that had “an unexpected sharp and sustained explosion in demand.” Target ended Q3 in a better inventory position and expects additional recovery in Q4.

For the first three quarters of 2020, Target grew sales by $10 billion, which Mulligan said is more than its total sales growth between 2011 and 2019. On whether the retailer will continue to have enough capacity to support sales growth as the digital business builds, he cited the decision to make stores fulfillment centers. The retailer cross-trained half of each store’s employees in fulfillment to handle the expected digital sales surge for the holidays, said Mulligan.

Target didn't provide guidance for Q4 due to “continued headwinds facing the consumer and the economy,” said Chief Financial Officer Michael Fiddelke. He referenced uncertainty about the path of the COVID-19 pandemic and continued levels of employment, along with a change in the mix of consumer spending. A “meaningful portion” of spending has shifted away from travel and out-of-home entertainment to “categories we sell.” Target benefited from trip consolidation where customers buy products they need across categories in one visit, he said. Typically, electronics and toys are half of Q4 sales. Both categories have had “dramatically stronger sales since the pandemic began,” making it more difficult to predict Q4 trends this year.

Mulligan used sales per foot as a “hypothetical” gauge for Target's growth capacity. For 2019, Target’s sales per foot average was $320; it grew 19% through Q3, and Mulligan projected, “as a thought exercise,” that at the same sales pace in Q4 the metric would reach $380 per foot by year-end. Target's top quartile stores averaged over $400 per foot in 2018 and have grown to over $500 a foot since, he said, saying there’s also room for growth in the other stores.

Target is testing the concept of sortation centers in markets with high delivery density to free up back room space and enable “additional throughput,” said Mulligan. It recently opened a test sortation center in Minneapolis to assess the concept before a broad rollout. Stores can focus on packing orders, which are transferred multiple times a day to the sortation center, he said. The strategy could reduce the number of split shipments, cut per unit shipping costs and eliminate the need for investment in more fulfillment centers, he said.

To support the store fulfillment strategy, stores need enough space to fulfill conventional store sales and digital orders, Mulligan said. Target is looking at ways to free upfront space to accommodate pickup and drive-up orders and back-room space to accommodate peak demand for ship-from-store capabilities. In existing markets, the retailer is moving the bulk of ship-from-store orders to lower volume stores. Target opened 18 new stores in October and 30 for the year; 29 were small format, he said.

Target has doubled the number of drive-up spaces for orders placed online, and put in procedures to make order handoffs “completely contactless,” said Cornell, addressing customers’ safety concerns. In self-service lanes, customers no longer have to use the hand scanner to pay with their wallet function in the Target app. When customers pick up an item using drive-up, employees no longer have to scan a customer’s phone. On Target.com, shoppers can check in advance to see whether traffic is being metered in store and allow them to reserve a spot in line before leaving home, he said.

The retailer stretched out holiday promotional events vs. holding the type of Black Friday events that typically draw crowds, Cornell noted. In Q&A, Cornell said consumers reacted “very positively” to early holiday sales and showed support for Target’s decision to close on Thanksgiving and avoid crowded events.

In the quarter, exceptionally low markdown rates” partially offset higher digital fulfillment and supply chain costs and “unfavorable category mix,” said Fiddelke. Strong sales growth offset higher costs for COVID-19-related safety measures and the impact of the retailer’s minimum wage increase to $15 per hour, which took place in Q3. The stock closed 2.4% higher Wednesday at $166.85.