Target Continues to Grow; Updates Holiday Guidance

But company shares fell because of continued supply chain woes and inflationary pressures.
Published November 17, 2021
By: Kellie Ell

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Target Corp. is ready for the holidays. 

The Minneapolis-based big-box retailer revealed quarterly earnings Wednesday before the market opened, improving on the top and bottom lines thanks to strength across all five core categories. Target raised its fourth-quarter guidance as a result, saying it was ready for the upcoming holiday season. 

“The consistently strong growth we’re seeing in our business, quarter after quarter, is a testament to the passion and commitment our team brings to serving our guests and the trust we’ve built with them as a result,” Brian Cornell, chairman and chief executive officer of Target, said in a statement. “Following comp growth of nearly 21 percent a year ago, our third-quarter comp increase of 12.7 percent was driven entirely by traffic and reflects continued strength in our store sales, same-day digital fulfillment services and double-digit growth in all five of our core merchandising categories. With a strong inventory position heading into the peak of the holiday season, our team and our business are ready to serve our guests and poised to deliver continued, strong growth, through the holiday season and beyond.”

Other key metrics included store comparable sales, up 9.7 percent during the three-month period ending Oct. 30. That’s on top of 9.9 percent growth the same time last year. Digital comparable sales rose 29 percent, year-over-year, on top of 155 percent growth last year. Total revenues for the quarter were $25.6 billion, up from $22.6 billion a year earlier. Same-day services — including buy online, pick up in store, drive-up and Shipt — grew nearly 60 percent during the quarter, on top of 200 percent growth last year.

The company logged $1.48 billion in profits, compared with $1.01 billion last year, as a result. 

Cornell told analysts on Wednesday morning’s conference call that traffic, both in stores and online, was the primary growth driver during the quarter. 

“Our guests increasingly turn to Target to serve their wants and needs,” he said on the call. “Within our digital capabilities, more and more of our guests are trying and embracing our industry-leading same-day services. This provides a vivid demonstration of the flexibility of our operating model to serve our guests no matter how they choose to shop.”

The CEO pointed out that third-quarter sales through same-day services have increased 400 percent, or by $2 billion, over the last two years. In the first three quarters of the year since 2019, revenues through all same-day services have grown by more than $6 billion. “A number larger than the total sales of many prominent retailers,” Cornell said. “All of these results reflect a level of guest engagement far beyond what many would have imagined a few years ago.”

By category, essentials, beauty and food and beverage had the biggest gains in the most recent quarter, with midteens comp growth, year-over-year.

 

Comparable apparel sales grew in the low double digits, with strength in swimwear, young contemporary, intimates and hosiery. Home goods also had low double-digit comp growth thanks to back-to-school and seasonal products, such as Halloween.

Earlier this year, Target revealed that its All in Motion brand has surpassed the billion-dollar revenue mark in less than a year, making the activewear brand Target’s 10th billion-dollar owned brand. 

The retailer also offers private label and national brands, such as Levi’s, Journelle, Thinx period panties and Priyanka Chopra’s hair care brand Anomaly, among others, both in stores and online.

In February, Target opened its first Apple shops-in-shop, followed by Ulta Beauty shops-in-shop over the summer. 

Christina Hennington, executive vice president and chief growth officer at Target, said on the call that the retailer is tripling its Disney shops-in-shop, while doubling the number of Apple experiences in Target stores.

Target raised its fourth-quarter holiday guidance as a result. The company now anticipates comparable sales to increase in the high-single to low-double digits, compared with prior guidance of high-single digits. The retailer said it continues to expect its full-year operating income margin rate will be 8 percent or higher. 

Yet shares of Target closed down 4.73 percent Wednesday to $253.80 apiece. Some investors worry about continued supply chain woes and inflationary pressures ahead of the all-important holiday shopping season. 

Mass-merchant rival Walmart Inc. revealed quarterly earnings Tuesday, also topping previous top- and bottom-line records, only to have the stock fall more than 2.5 percent at closing.

“We remain cautious on supply chain headwinds throughout the holiday season, although [Target] has stated it is confident with inventory levels,” read a note from Jane Hali & Associates. “Across our in-store and online shops, we noted some out of stocks, but also noted continuous restocks.”

The research investment firm rated Target’s stock as “neutral.” 

But Cornell told analysts that supply chain issues are nothing new. 

“We’ve certainly seen supply chain challenges going all the way back to the start of the pandemic, as demand across the U.S. continued to build,” he said. “So, we’ve done a terrific job and I think our teams have shown great agility. They’ve adjusted to the marketplace to make sure that we’ve been able to meet the demand in our system. But we don’t expect those supply chain challenges to go away as we go into the start of next year and I think they’ll dissipate over time. So, we’re doing our fair share to make sure that we’re alleviating some of the congestion in the ports and making sure that we’re unpacking containers in off-peak hours. We’ve utilized other ports across the country to try to relieve some of the congestion in [Los Angeles], Long Beach, [Calif.]. But we know we’re still going to face some supply chain challenges as we go into 2022. There’s still uncertainty as we think about supply from Asia, as different factories from time to time were closed. And we’re just going to have to show great flexibility and agility to provide the product that our guests are looking for and our system requires as we plan for the next fiscal year.”

In addition, Target has prioritized holiday-sensitive categories, written holiday purchase orders earlier in the year and secured additional rail, truck and air capacity, all in an effort to mitigate risks associated with port delays, John Mulligan, executive vice president and chief operating officer at Target, said on the call.

“Our team has been actively collaborating with government and port officials to help find solutions that will allow everyone’s containers to move through the ports more quickly,” he said.

Arun Sundaram, equity analyst at CFRA Research, maintained a “buy” opinion on Target shares, writing in a note that the stock has long-term investment potential.

“The shares are trading lower as gross margins fell below expectations, largely from [Target] absorbing higher freight and inventory costs,” Sundaram wrote. “We think any pullback today represents a buying opportunity, as investors seem overly focused on near-term cost pressures, as opposed to the investments [Target] is making to preserve its sales [and] market share momentum over the long run.”

Target has more than 1,900 brick-and-mortar stores around the U.S., including 15 locations that opened in the most recent quarter. The company ended the quarter with $11.5 billion in long-term debt and $5.75 billion in cash and cash equivalents. Shares of Target are up approximately 52 percent, year-over-year. 

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