If you just looked at Target's (TGT 1.73%) operating income and margin during the first quarter, you might be worried about how the retailer will fare in the next stages of the coronavirus crisis and beyond.
Target's operating income slid 59% and its gross margin rate fell to about 25% from more than 29% a year earlier. Like peers, costs related to wages and safety measures weighed on profit. And a decline in the sales of higher-margin discretionary items hurt too.
Still, Target's overall sales soared as customers rushed to the retailer's stores and online platform for the essentials. Two elements in particular -- both strengths in the recent earnings report -- bode well for the company's future.
Image source: Getty Images.
1. Digital and delivery
Digital growth is no stranger to Target. In 2019, Target increased digital sales more than 25% for the sixth straight year. But as shoppers chose to stay home amid the coronavirus outbreak, the boost to digital was colossal. In the first quarter, digital comparable sales surged 141%. April was the biggest month, with digital sales soaring a whopping 282%.
At the same time, shoppers favored pick up and delivery options, which offered those areas a lift as well. Drive-up orders by unit in the first quarter came in higher than in all of 2019. The growth seen in the first quarter pushed Target's digital business ahead by a few years. The company said it didn't expect digital volumes of that level for another three years.
2. Market share
During the quarter, Target said it gained market share across all product categories: beauty and household essentials, food and beverage, home furnishings and decor, apparel and accessories, and hardlines. This isn't surprising, as many businesses selling non-essential items temporarily shut their doors. And often, smaller specialty operations aren't set up for e-commerce and delivery -- especially during a crisis.
Here, too, Target's delivery/pickup offer shined. Of the more than 5 million customers using drive-up to collect orders during the quarter, 40% of them used that option for the first time. Target's wholly owned subsidiary Shipt saw 60% growth in membership, and Target's sales through Shipt jumped 300% year over year. Shipt is a same-day delivery service with a network of personal shoppers.
Will the trend continue?
It's clear that Target made progress in leaps and bounds in both digital sales and delivery/shipping, as well as market share in the quarter. But will the trend continue?
Well, first, as we look ahead to the next stage of the coronavirus crisis and post crisis, it's likely that sales gains will slow to a certain degree. There won't be the same need for stockpiling, and rival businesses that were closed will reopen.
But as stockpiling-driven shopping declines, purchases of discretionary items may rebound. Target said in its earnings call that as of mid-April it already saw an increase in sales of non-essentials, including apparel. And Target's performance fulfilling orders may ensure customer loyalty. During the quarter, 95% of orders were prepared to be shipped or picked up on time.
Though it's impossible to predict how much Target's digital business will grow after this recent surge, the general outlook for e-commerce sales is a reason to be positive. In a study released just before COVID-19 became a pandemic, U.S. e-commerce retail sales are expected to grow 64% from last year to nearly $600 billion in 2024, according to Statista.
Investors may have to be patient as Target recovers from the coronavirus' impact on profit and margins. But recent progress made in digital sales and attracting customers will drive future revenue and profit growth. And that makes me optimistic about the share performance of this retailer over the long term.
