Target (TGT +2.33%) impressed this week when it reported its second-quarter results. Shares shot up after the report was released and finished the week up about 5% since the results were posted on Wednesday. The quarter highlighted solid execution and a healthy consumer environment as revenue increased 6.9% year over year and customer traffic rose 6.4% -- the strongest growth in that key metric since the company started reporting it in 2008.
But there's more to the quarter than these headlines. With a number of initiatives underway to shake things up, including remodels, the rollout of small-format stores, and the ongoing integration of its Shipt acquisition late last year, Target's earnings call included a lot of information for investors to mull over.
A Shipt shopper delivering groceries. Image source: Shipt.
Here are some key quotes from the call (via an S&P Global Market Intelligence transcript).
Remodeled stores are driving outsize growth
One way Target is attempting to better position itself for growth is by remodeling its stores in a way that maximizes both the customer experience and Target's growing fulfillment initiatives. The ambitious undertaking includes a goal to remodel over 300 stores this year. Fortunately, management said it's on track with its plan, completing 113 remodels in the second quarter alone. Furthermore, management noted that at one point during July, Target had 258 locations that were being remodeled -- "the highest at any time in our history," said COO John Mulligan about the initiative.
But how are these remodeled stores performing? Early data looks very promising, according to Mulligan:
While our remodel project creates an optimal platform for all of our fulfillment initiatives, it also provides our guests with a more inspiring environment that's easier to shop, and our guests continue to respond by shopping more often. Specifically, consistent with our plan, we continue to see traffic-driven incremental sales lifts of 2% to 4% in our remodeled stores following completion of the remodel. And while the data is limited, we are seeing some early indications that remodeled stores continue to out-comp other stores beyond the first year after the remodel.
Target's small-format stores are a success
Another way Target is attempting to boost its business productivity is by launching more of its new small-format stores, which are proving to be more efficient operations than the company's traditional stores.
Mulligan explained:
These locations deliver high sales productivity along with gross margin rates above the company average. And we continue to see strong growth as these stores mature. At the end of the second quarter, we are operating 26 mature small-format stores, and on average, this group saw high single-digit comp growth during the quarter.
Target opened six of these new stores in both Q1 and Q2.
Shipt is growing rapidly
Finally, there's Target's late 2017 acquisition of leading same-day delivery platform Shipt -- a move the company made to boost its fulfillment capabilities. Shipt, which continues to serve customers other than Target, is seeing very strong growth, Mulligan said.
Over the last year, Shipt's membership base has more than tripled while orders, revenue and GMV are 2 to 3x higher. While some of this growth is being driven by Shipt's entry into new markets, we're seeing orders and [gross merchandise volume] in comparable markets, meaning markets in which Shipt was already operating a year ago, that are up nearly 100% year-over-year.
Target's store remodels, small-format stores, and its fast-growing same-day delivery service show how the company is investing aggressively in growth areas, building a good case for Target's strong growth to persist. Management is clearly expecting its momentum to continue, as Target guided for comparable sales growth to rise 4.8% in the second half of the year, in line with the strong growth Target delivered in the first half of the year.
