'Growth on Top of Growth' at Target

Grocery sales boost led by popularity of pickup service
Gina Acosta
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'Growth on Top of Growth' at Target
Target says it hasn't seen a slowdown in store traffic due to the Delta variant surge.

Target impressively grew its food and beverage sales during the second quarter despite the high volatility related to the pandemic and even when compared to last year's pantry-loading boost.

During an earnings call, Target EVP/Chief Growth Officer Christina Hennington said the retailer grew its food and beverage comparable sales during the quarter ended July 31 by the "low double digits." That growth was led by the retailer's bakery, cafe and deli businesses, which grew 50% as some of the departments were closed during part of second quarter last year.

Hennington said Target's fresh department overall grew in the low double digits, and that a 50% increase in produce sales was led by the retailer's Drive Up grocery pickup service.

"Even as we face challenges related to the Delta variant, product cost inflation, supply chain bottlenecks, our entire team delivered superior performance," Hennington said. "Our unique multi-category assortment offers the right balance of what our guests want and need, even as they change, sometimes rapidly."

Hennington said own brand sales outpaced the company in the second quarter, with growth in the mid-teens. She said the company is seeing "tremendous growth" in its Good and Gather and Favorite Day brands. Own brand penetration increased 70 basis points when compared to the prior year, she said.

For the second quarter, same-store sales at Target grew 8.9%, on top of record growth of 24.3% last year. Same-store sales growth was driven entirely by traffic to stores. Store comparable sales increased 8.7%, on top of 10.9% growth last year. Digital comparable sales grew 10%, following growth of 195% last year. Digital sales continue to be led by same-day services (Order Pickup, Drive Up and Shipt), which grew nearly 55% this year, on top of more than 270% last year. More than 95% of Target’s second quarter sales were fulfilled by its stores.

"In the second quarter, our business generated continued growth on top of growth, reinforcing Target’s leadership position in retail," Target Chairman and CEO Brian Cornell said. "We’ve spent years building and investing in the durable model we have today, which is supported by a differentiated strategy and the best team in retail. Even after unprecedented growth over the last two years, we see much more opportunity ahead of us, and we’re leaning into opportunities to invest in the long-term growth and resiliency of our business. Our team and operating model can seamlessly adapt to changes in the environment, and we’re well-positioned to deliver outstanding performance in the back half of the year.”

Cornell said during the earnings call that he's not seeing any effect from the Delta variant surge on store traffic.

“We continue to see a very optimistic guest,” Cornell said. “We have a very resilient consumer. We are not seeing any adjustment in consumer behavior.”

For the second half of 2021, the company expects high single digit growth in comparable sales, near the high end of the previous guidance range. The company now expects its full year operating income margin rate will be 8% or higher.

During second quarter, total revenue of $25.2 billion grew 9.5% compared with last year, driven by total sales growth of 9.4% and a 20% increase in other revenue. Operating income was $2.5 billion, up 7.2% from $2.3 billion in 2020.

Second quarter gross margin rate was 30.4%, compared with 30.9% in 2020. This year's gross margin rate reflected pressure from higher merchandise and freight costs and the comparison over last year's change in the sales return reserve estimate. These pressures were partially offset by the benefit of low markdowns, favorable category mix, and a shift in fulfillment mix into lower-cost same-day fulfillment options.

The company repurchased $1.5 billion worth of its shares in the second quarter, retiring 6.6 million shares of common stock at an average price of $233.81. As of the end of the second quarter, the company had approximately $1.8 billion of remaining capacity under the repurchase program approved by Target’s Board of Directors in September 2019.

In addition, the company announced that Target's Board of Directors has authorized a new, $15 billion share repurchase program. Repurchases under this program will begin upon completion of the 2019 program.

"For decades, Target's capital deployment priorities have remained the same: First, we fully invest in our business, in projects that meet our strategic and financial criteria.  Then, we return capital to our shareholders through a thoughtful balance of dividends and share repurchases, within the limits of our middle-A debt ratings," said Michael Fiddelke, EVP and CFO. "Our continued strong operating performance and ability to generate cash have supported meaningful investments in our team and our business, along with the return of capital through both dividends and share repurchases. This new authorization reflects our confidence in the sustained, strong performance of our business, which will enable continued share repurchases in keeping with our long-standing capital deployment goals."

Earlier this month Target joined Walmart and other food retailers launching programs to attract workers in a national labor crunch.

The retailer said it will cover the cost of tuition, fees and textbooks for more than 340,000 part- and full-time workers who pursue a qualifying undergraduate degree at more than 40 institutions. It will also fund advanced degrees, paying up to $10,000 each year for master’s programs at those schools. Target says it will invest $200 million over the next four years in the program.

“Target employs team members at every life stage and helps our team learn, develop and build their skills, whether they’re with us for a year or a career. A significant number of our hourly team members build their careers at Target, and we know many would like to pursue additional education opportunities. We don’t want the cost to be a barrier for anyone, and that’s where Target can step in to make education accessible for everyone,” said Melissa Kremer, chief human resources officer, Target. “Our team members are the heart of Target’s strategy and success, and we have a long history of investing in industry-leading pay, extensive benefits and career opportunities to help our team thrive and have rewarding careers at Target.”

Target's announcement came a week after Walmart, the largest private employer in the country, said it would pay for college tuition and books for its part-time and full-time associates.

Details of the new Target initiative include:

  • Debt-Free Education: Target will support team members taking courses for high school completion, college prep, English language learning and select certificates, certifications, bootcamps, associate and undergraduate degrees. Team members can attend classes at more than 40 schools, colleges and universities, choosing from an industry-leading 250 business-aligned programs from Business Management and Operations to IT, Computer Science, Design and more. Team members who opt into this program won’t have any out-of-pocket costs and will have flexibility to find opportunities that fit with their interests, schedules and career goals. Academic institutions include the University of Arizona, Oregon State University, University of Denver and eCornell along with HBCUs Morehouse College, Paul Quinn College and more. 
  • Tuition Assistance: For team members pursuing educational opportunities outside of the select business-aligned programs within the Guild network of schools, including master’s degrees, Target will provide direct payments to their academic institution of up to $5,250 for non-master's degrees and up to $10,000 for master’s degrees each year to reduce the burden of up-front, costly tuition payments. 
  • Educational Supplies: Target will also ensure that smaller out-of-pocket expenses and fees, such as textbooks and course fees, that may hinder team member participation, will also be covered at no cost to them.  

This education assistance program is part of Target Forward, Target’s new sustainability strategy that includes goals to create an equitable and inclusive workforce. It also builds on Target’s well-established learning and development programs that offer a variety of opportunities for team members to learn and grow in their careers. Team members spend more than 7 million hours in training annually, including participation in functional learning courses and trainings, leadership development programs, coaching, mentoring and more.

This is also the latest in a long history of investments Target makes to support the health, safety, well-being and career development of its team members.

Target most recently awarded all U.S.-based front-line hourly full-time and part-time team members in stores, distribution centers and contact centers a $200 recognition bonus. And, in 2020, Target invested an additional $1 billion in the well-being, health and safety of team members compared with 2019. This included Target’s industry-leading move to a $15 starting wage for all U.S.-based team members, along with five recognition bonuses Target paid to thank team members for their work throughout the pandemic. 

Minneapolis-based Target Corp. is No. 6 on The PG 100, Progressive Grocer’s 2021 list of the top food and consumables retailers in North America, with nearly 1,900 locations.

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