Investors had high expectations for Target's (TGT -0.64%) fourth quarter, and with good reason. The retailer was firing on all cylinders, showing strength in key product categories, and its same-day fulfillment options were expected to play a key role in the shortened holiday shopping season.
But sales in November and December came in lower than expected, Target's management said in an earnings pre-release. Same-store sales grew just 1.4%, compared to its previous guidance of 3% to 4%. Digital sales grew just 19% in the two months, a marked slowdown from the 31% growth it posted in both the third quarter and in the fourth quarter a year ago.
Target's results are certainly disappointing, but it'll pay to dig deeper into the data Target provided in its release.
Weakness in key seasonal categories
The biggest source of weakness in Target's sales came from toys and electronics -- two of the biggest categories for holiday sales. Combined comparable sales for the two categories were down 3% year over year.
Management says toys, electronics, and certain sub-categories of homegoods (down 1% year over year) account for one-third of holiday sales. So a weakness in those categories had an outsized effect on Target's overall sales growth.
Sales for toys were roughly flat, despite a partnership with ToysRUs.com that was expected to boost sales in the category. Target says this represents weakness across the industry, as data from NPD Group suggests it gained market share in toy sales. That may indicate the shortened holiday season had a bigger effect than retailers were expecting, despite confidence in early November.
A slowdown in digital sales growth
The biggest surprise from Target's report is the stark slowdown in digital sales to just 19% year over year. That growth could come in lower than its biggest online retail competitor Amazon (AMZN -0.66%), which has seen accelerating retail sales growth following the introduction of one-day shipping on millions of items for Prime members.
Early data indicates Amazon is stealing sales from brick-and-mortar retailers thanks to one-day shipping, and it makes sense that it could also steal digital sales from those same retailers. Target offered all of its shoppers free shipping (usually in one or two days) for the holiday season, but Amazon offered a much broader selection and could promise speedy delivery for Prime members.
Same-day fulfillment grew 50% year over year and accounted for three-quarters of Target's digital sales growth. Same-day options accounted for 80% of Target's 31% digital sales growth in the third quarter, though, so it seems same-day fulfillment didn't drive customers to Target.com as many expected during the shortened holiday season.
What it means for 2020
After a stellar start to 2019, Target's ending the year on a sour note. But the good news for investors is that the company is still showing strength in less seasonal and higher-margin categories. Apparel and Beauty sales increased by more than 5% each. Those are categories where Target's exclusive brands help it stand out and produce higher gross margins.
Slowing online sales growth, including its same-day fulfillment services, is a bit concerning though and suggests Amazon's one-day shipping could be affecting the company. Investors will have to wait and see how Amazon's and other competitors' fourth quarter shook out to see if the slowdown in online sales was widespread across the retail industry or specific to Target.
Target's weak holiday sales may foretell a bigger-than-expected slowdown in sales growth at Target after a couple of years of excellent results. Analysts currently expect sales growth to come in at 4.3% in 2020 and 3.6% in 2021. But if Target can concentrate its growth in high-margin categories, weaker sales growth should have a limited effect on its bottom line, which is exactly what happened last quarter. Management reiterated its earnings per share guidance for the fourth quarter and could maintain its strength through 2020.