Target reports solid sales as it continues digital investment

Target today reported a strong performance in its fourth fiscal quarter, which ran from November to January 2018, with comparable sales rising 3.6%. Traffic grew 3.2%, with both stores and digital channels performing well. Online sales were up 29%, beating Walmart’s growth in this area during the period.

“Our fourth quarter results demonstrate the power of the significant investments we’ve made in our team and our business throughout 2017,” said Brian Cornell, chairman and CEO at Target. “Our team’s outstanding execution of our strategic initiatives during the year delivered strong fourth quarter traffic growth in our stores and digital channels, which drove healthy comparable sales in every one of our five core merchandise categories.”

Cornell added that the retailer’s plan is to continue investing areas of the business which set Target apart from competitors, including stores, exclusive brands, and its growing suite of fulfillment options.

“While we have a lot left to accomplish, our progress in 2017 gives us confidence that we are making the right long-term investments to best position Target for profitable growth in a rapidly changing consumer and retail environment.”

Digital investment

The retailer has spent billions on its omnichannel offering. It has strengthened its eCommerce business; for instance, buying Shipt, a membership-based marketplace and same-day delivery platform that allows customers to place online orders for fresh food and household items from nearby stores.

The deal, at a staggering $550 million, is one of the largest acquisitions in the retailer’s history, and is part of a supply chain digital strategy that has also included launching Target Restock and Drive Up, acquiring Grand Junction, a last-mile transportation technology company, and expanding ship-from-store capabilities to over 1,400 stores nationwide.

It is also in the process of reimagining more than 1,000 stores across the US by the end of 2020, announcing yesterday that it will put $250 million towards overhauling 28 of its Twin Cities stores (about half) this year, on the way to enhancing all area stores over the next few years.

As a result of such hefty investments, despite the sales increase, operating income fell by 15.8%. This spooked Wall Street, sending shares down 4% in premarket trading. Excluding certain items, Target posted a profit of $1.37 per share in the quarter ended 3rd February, below the average analyst estimate of $1.38.

Neil Saunders, MD at GlobalData Retail is upbeat about the results: “While we understand the concern over increasing costs, we are critical of voices that see this as a weakness. We take the contrary view: if it is to grow, Target needs to invest, including in customer service, which affects wages,” he said.

“The alternative, which is to restrict or throttle investment, may deliver more profit in the short-term, but it will be to the detriment of long-term performance. Wall Street's myopic view on this matter – both about Target and other retailers – is problematic and demonstrates a lack of knowledge about the current dynamics of the retail market.”

The sales results more than justify the increased costs, he argues. “Indeed, we are encouraged that the 3.6% uplift in comparables was driven by an evenly split contribution from stores and online. Not only does this indicate that Target's omnichannel strategy is delivering, but it also shows that the store enhancements are working. In essence, it justifies Target's view that stores remain a critical part of the proposition and are worth spending money on.”

Despite the good numbers, the sustainability of performance is open to question, Saunders believes. He points out that Target's results were delivered over a period of robust trading for the retail sector. Nonetheless, the near future looks good.

“The January numbers and our consumer data from February both suggest Target remains on a steeper growth curve. Moreover, we believe that the benefits of further store refurbishments, more investment in own-label products, and the driving of digital growth from the integration of Shipt, will all aid future performance. In short, Target is a company on the move, and it is gaining momentum,” he concluded.