Target's Comp Sales, Traffic Jump; Costs Rise on Vendor Price Hikes

Target bumped up sales guidance for the holiday quarter to “high-single digit to low-double digit growth” in comparable sales, compared with previous guidance for a high-single-digit percentage increase, said Chief Financial Officer Michael Fiddelke on a Wednesday earnings call. Q3 revenue exceeded expectations, popping 12.7% for the quarter ended Oct. 30.

On rising costs, Fiddelke said supply chain bottlenecks “should ease over time,” but Target faces product cost increases from some vendors “driven by higher costs in their businesses.” He also cited higher costs associated with the tight labor market. Target's financial outlook focuses first “on serving our guests,” said Fiddelke, which he said should lead to further growth.

Target aims to hire 100,000 employees for the holiday season, giving them the opportunity to remain on staff post-holiday, said CEO Brian Cornell. In Q&A, Chief Operating Officer John Mulligan said managers this year are asking store workers which hours they want “and what can we do to cross-train you to get you the hours you need.” It’s investing in its distribution center teams to grow staffing, and efforts have been successful, he said, with turnover below 2019 levels. “Labor’s going to continue to be tight, and we’ll continue to focus on retaining our existing team," Mulligan said.

Cornell said Target is using all its assets to grow market share, building on the $9 billion in share the retailer gained in 2020. He credited the supply chain team for “agility” in adjusting to the market to meet demand. The executive doesn’t expect the supply chain issues to go away at the start of 2022 but thinks "they’ll dissipate over time.”

Efforts Target is taking to alleviate port congestion include unpacking containers during off-peak hours and using other ports in the country to alleviate congestion in Long Beach, California, said Cornell. “There’s still uncertainty as we think about supply from Asia as different factories from time to time are closed,” he said. In managing through supply chain bottlenecks, Target prioritized holiday-sensitive categories within import receipts while “thoughtfully planning domestic transportation” to make sure products hit shelves at the right time, said Mulligan.

Cornell said management was surprised in Q3 by continued growth in store traffic, which was up nearly 13%. Store comp sales were up nearly 10% on top of 9% in the 2020 quarter, he said. The digital business grew about 30% vs. 155% growth in the year-ago quarter. All five product categories had double-digit growth, he said.

Within Target’s digital business, sales on orders shipped to home increased slightly over last year, while same-day services grew 60% on top of a 200% spike a year ago, said Fiddelke. In-store pickup and same-day Shipt deliveries grew 30% in the quarter; drive-up business jumped 80% on top of 500% growth in the 2020 quarter. Since 2019, sales through drive-up expanded more than 10 times, reaching $1.4 billion in Q3, he said.

Target continues to have periodic outages across different items and categories but is heading into the holidays with a healthy inventory position, said Mulligan. Inventory at the end of Q3 was nearly $2 billion, 18% higher than last year. Target’s end-Q3 inventory grew by more than $3.5 billion since October 2019, he said. A “sizable amount” of that inventory will continue to flow to stores in the next few weeks, he said. The operations team has “clear visibility into where the inventory is located and when it will arrive in our stores.”

Q3 revenue grew 13.3% year on year to $25.7 billion for the quarter, Target said. Cost of sales widened by 17.4% to $18.2 billion. Shares dropped 4.7% Wednesday to close at $253.80.