After 3.4% Q2 Comp Growth, Target Eyes Similar Results for Q3, but Concerns Loom
Riding Q2 comparable sales that grew 3.4 percent, with a 2.4 percent rise in store traffic, Target is projecting similar sales growth for Q3, CEO Brian Cornell said on a Q2 earnings call Wednesday. But management is “mindful of the volatility and uncertainty in the marketplace, including the timing and extent of additional China tariffs,” said the CEO.
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Noting that 10 percent List 4 Section 301 tariffs are set to hit Sept. 1 on apparel, TVs, toys and home goods, Cornell said Target is following developments carefully: “We’re encouraged that many items originally slated for tariff increases in September have now been delayed until later in the year,” he said of the List 4B tariffs deferred until Dec. 15. As long as the trade situation with China “remains fluid,” he said, “it will present an additional layer of uncertainty and complexity as we plan our business.”
In Q&A, Cornell noted the Trump administration’s multiple shifts in strategy on tariffs over the past few weeks: “As it sits right now, this is largely a 2020 issue,” he said. All of the current tariffs are built into guidance and plans for the rest of 2019, he said. To navigate the current period of “heightened volatility,” Target will rely on its broad multi-category assortment, “deep expertise in global sourcing” and a “sophisticated set of manufacturing partners around the world,” said the executive.
Target raised earning-per-share projections for the full year to $5.90-$6.20 vs. the prior $5.75-$6.05, said Cornell. For Q3, it projected EPS of $1.04-$1.24. Q3 and full-year EPS “may include the impact of certain discrete items,” said the earnings release, saying the retailer isn't currently aware of any discrete items. Guidance reflects “the most recent announcement about the extent and timing of China tariffs,” said Cornell.
Speaking to the impact of Target’s ongoing business transformation begun in 2017, Chief Operating Officer John Mulligan highlighted the retailer’s evolving digital fulfillment operations where the mix is “moving dramatically” toward its same-day services: in-store, drive-up pickup and Shipt. Combined sales for those services more than doubled year on year, accounting for three-quarters of Target’s 34 percent digital comp increase in the quarter and 1.5 percentage points of overall comp growth, he said. The three services accounted for more than a third of digital sales in Q2, up from 20 percent in the year-ago quarter, and are growing “much faster than our digital sales,” Mulligan said.
Customers are responding to the benefits of the same-day services: immediacy and the convenience of receiving orders either at home, at the front of the store or in the parking lot, Mulligan noted. It’s “standard” for drive-up customers to receive orders in under two minutes, he said, and average time is even better. The store-based options negate porch piracy and eliminate the need for consumers to open a cardboard box and discard it, he said. High net promoter scores associated with same-day services indicate customers want to use the services “again and again after they’ve tried them.” The same-day services are cost-efficient for Target because they leverage existing store assets and teams, and they’re very profitable, said Mulligan. Operational efficiency for in-store and drive-up pickup services improved by 30 percent, he said.
Digital sales grew 34 percent in Q2 on top of “significant growth” in the year-ago quarter, said Cornell in Q&A. Drive-up, pick-up and Shipt are the company’s “cheapest” and fastest fulfillment methods, said Mulligan, saying Target expects its digital growth to outgrow the industry by at least two times, he said.
Store sales still account for 90 percent of overall Target revenue and will be important for “the vast majority of retail sales for many years to come,” but the number of choices available to consumers means “inferior brick-and-mortar experiences will go away,” said Mulligan. That’s the driver behind Target's three-year plan to remodel about 300 stores per year, optimizing them for digital fulfillment, he said.
Commenting on the annual July retail event Amazon created around Prime Days, Cornell said the promoted summer cyber events “drive consumer interest” and create a “natural spike” in digital traffic that allows Target to create its own promotions, gain mindshare with consumers and "convert this traffic into additional orders and sales.” The acceleration of orders also allows Target to test its operations for a “surge in demand” in advance of the Q4 holiday shopping season, he said.