Operating as an essential retailer in the coronavirus pandemic has proven to be a test of flexibility for Target Corp., as the mass merchant saw shut-in shoppers turn its stores into increasingly high-volume drive-up units for food, home goods and finally apparel and electronics over the course of an extraordinary fiscal first quarter.
By the time the three-month quarter ended May 2, the Minneapolis-based retailer saw sales had increased 11.3% to $19.4 billion; comps increase by 10.8%; and e-commerce by 140%, with nearly 80% of those virtual transactions facilitated at stores. Target’s same-day delivery and Drive Up options showed quarterly growth of 278% and accelerated over the course of the quarter, indicating the options were drawing new customers who might have been turned off by congestion in competing delivery and store options: Chief Operating Officer John Mulligan, speaking in a conference call with analysts, said 5 million guests used Drive Up in the period, with more than 2 million for the first time.
“One thing we’ve observed about this crisis is that it is causing an acceleration in consumer trial and adoption of digital shopping,” Mulligan said, according to a Sentieo transcript. “The ability of our operations to handle this unexpected acceleration has given us even stronger conviction that we have the right model, and we have ample capacity to handle continued change in the future. Specifically, as part of our long-range plans at the beginning of 2020, our first-quarter digital volumes weren't anticipated for another three years, but our operations accommodated that extra volume without any advanced planning. … It was an extreme test of our model and our team, and both performed admirably in the face of the challenge.”
The cost of rising to that challenge was also considerable for Target, with quarterly gross margin rates declining to 25.1% compared with 29.6% in 2019’s first quarter, reflecting the net impact of a sales mix change that saw apparel sales vanish for much of the quarter, higher supply chain and fulfillment expenses on the surging online sales, and investments in worker wages and benefits that more than offset leverage on sales growth.
Net earnings in the period declined 64.3% to $284 million.
Reflecting a similar cadence given a day before when Walmart reviewed its quarterly results, Target said consumer shopping patterns evolved over the quarter, with store traffic swelling and broad-based sales gains beginning in late February as the pandemic approached. Discretionary categories then fell away as consumers turned to food and essentials and shelter-in-place orders, along with other mitigation efforts, sparked a dramatic surge in digital traffic and consumer pursuit of home-related activities include office products, puzzles and games. This all crescendoed in late April, when customers made a return to stores and Target saw subsequent increases in bigger ticket items and apparel.
“The surge in stores occurred while our digital growth continued at unprecedented rates of 200% to 300% above last year,” CEO Brian Cornell said. “As a result, over the last couple of weeks of April, we saw some of the strongest comparable sales growth we've experienced in our history. When you put all these chapters together and look at the first quarter in total, our comparable sales grew nearly 11% with a wide range of performance across categories as guests changed their shopping pattern in response to the crisis.”
Also like Walmart, Target said the volatility exhibited over the quarter has made projections difficult. Target already withdrew fiscal year guidance and did not issue any projection, even eschewing much detail on the current second quarter.
Cornell said it was “really difficult for us to project with any kind of certainty how consumers are going to continue to shop in the second quarter and for the balance of the year.
“As we sit right now, I think the guest that’s shopping at Target is still seeing the benefits of the stimulus check,” Cornell added. “They’re shopping in our stores, and we’ve seen store traffic increase. We're seeing them shop all of our categories while continuing to utilize our same-day fulfillment services. But our ability to project how that’s going to play out over the balance of the quarter or year is unfortunately something that we can't do today.”