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Target Earnings Preview: Focus Will Be on E-Commerce and Convenience Shopping

By Jason Lee - Nov 17, 2019 at 10:20AM

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Target looks to continue a strong 2019 run with its third-quarter earnings report. Here's what to watch for on Wednesday.

Following a strong second quarter, retail giant Target ( TGT 1.05% ) investors are hoping the company can continue hitting the bullseye when it reports third-quarter earnings on Nov. 20. CEO Brian Cornell's mission to make Target "America's easiest to shop store," primarily through digital means, could spell big wins for current investors and be of interest to those looking to invest.

Here's what you need to know about the company and its upcoming report.

Person shopping on their computer

Image source: Getty Images.

Coming off a strong second quarter

In Q2, comparable digital sales grew 34% and accounted for 7.3% of total sales. While on the surface this looks great for e-commerce and digital sales, it's important to break down what accounted for the 34% growth. Nearly one-third of these sales come from same-day services, in-store pickup, and Drive-Up and Shipt. These are all options whereby purchases are made and fulfilled the same day, whereas with a traditional digital sale you order something and it shows up to your house in a box through a mail carrier. The increase to one-third reflects a 20% increase from the same period last year, meaning same-day convenience options are growing faster than traditional digital sales. The company fulfilled just under 5 million drive-up orders in Q1 and Q2 of this year, an increase of almost 100% from 2018.

Is this a positive? It depends on how you slice it. For investors who believe the retail apocalypse means the eventual demise of brick-and-mortar retailers, it could be alarming. Target's fastest digital growth is in areas that require store locations for fulfillment.

On the flip side, if Target can continue growth and profitability in its brick-and-mortar locations, it's certainly a positive. As CEO Brian Cornell put it during this year's Q2 earnings call when referring to the growth in same-day options, "These are remarkable statistics, and they demonstrate how rapidly our guests are learning about and embracing these new convenient options."

What do the numbers say? Last quarter they suggested the retail grim reaper is not seeing red at Target. In-store traffic increased by 2.4% and in-store comparable sales increased by 1.5%. As far as Target is concerned, more customers are making purchases at brick-and-mortar locations, and the company is bringing in more money as a result. As mentioned in the quarterly earnings call, the increase in traffic can be partly attributed to customers taking advantage of same-day service and making an additional purchase while on the property. In other words, the two programs are working hand-in-hand to drive revenue.

What to look for in the Q3 report

Investors are looking for answers on questions regarding three specific metrics in this week's earnings report, and they all have to do with the topic already referenced.

  1. Are same-day options in the digital channel continuing to grow? And, relatedly, are customers continuing to adopt a new way of shopping?
  2. What does the growth in traditional digital sales look like? Is it increasing alongside same-day digital options or is it lagging?
  3. Are brick-and-mortar sales continuing to grow or at least maintaining profitability?

In addition to these three metrics, there is one intangible piece of information investors should be looking for. Target is essentially looking to use current stores as fulfillment hubs for their growing convenience shopping options. As acknowledged in its Q2 earnings call, some fear this will be sustainable only while the number of orders being fulfillment is still relatively small. The company offered some guidance in the call as to how it plans to manage this potential growth.

In the upcoming release, investors should look for an update on the success of supply chain fulfillment as well as updated forward guidance, especially if there is continued growth in demand. In-store pickup loses its convenience if wait times increase and products become less readily available.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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