Dive Brief:
- Target's third quarter sales rose 4.7% year over year in the third quarter to $18.7 billion, as comparable sales rose 4.5%, according to a company press release.
- The retailer's gross margins expanded by more than one percentage point during the quarter, to 29.8%, and operating margin increased 0.8 percentage points. Operating income rose more than 22.3% to $1 billion, and Target's net income rose 14.8% to $714 million.
- After the solid Q3 numbers, management raised its earnings estimates for the full fiscal year. Target beat the FactSet consensus estimate on sales, comps and profit, and the retailer's stock spiked 8.8% in pre-market trading, according to MarketWatch.
Dive Insight:
Most everyone expected a good quarter from Target in Q3, and they got an even better one as the retailer's apparel sales, private label brands, digital channels and store traffic gave the mass merchant another boost.
In apparel, Target has surged past other retailers, such as Kohl's, that are struggling to capture shoppers. Target CEO Brian Cornell said on an analyst call Wednesday that apparel sales grew 10% during the quarter, adding to the retailer's market share in the segment.
He attributed the growth to several factors, not least among them "curating" its private label products to meet current fashion trends. Moreover, the retailer has had low markdowns in women's apparel, according to an emailed analyst note from Jane Hali & Associates. Cornell called apparel growth one of the highlights "of the quarter if not the year."
Private labels across categories helped buoy Target's sales and margins, executives said on the call. During the quarter, Target also rolled out its new Good & Gather private label line in food, which Cornell said started with 650 SKUs and is set to increase. He added that customers are "really, really excited about the offering" of the new food label, in a category where Target has historically been under-penetrated with its own brands.
Driving the mass merchant's expansion in comps was both an increase in customer traffic to Target's stores — which have benefited from recent remodels, Cornell said — and digital growth. Digital sales comps for the quarter rose 31%, with 80% of that growth coming from same-day fulfillment services like order pickup, drive up and its Shipt delivery services. Cornell said that "all factors of our business were working as one" during the quarter.
Analysts agreed. Charlie O'Shea of Moody's said in emailed comments that "Target continues to operate in rarified air," pointing to the retailer's increased operating margin during the quarter.
Wells Fargo analysts led by Edward Kelly wrote that the retailer "crushed it" in Q3. "TGT clearly has momentum, its strategy is working, and it's becoming more obvious that this company is positioned to take share long-term in the structurally evolving retail landscape," the analysts wrote in an emailed client note.
GlobalData Retail Managing Director Neil Saunders wrote that Target's Q3 performance "underlines the fact there is growth available in the consumer economy and that those retailers which inspire and engage customers can grab a slice of it." He added, "That said, Target has also outperformed the overall retail sector over the third quarter period, showing that it is taking market share from rivals."
Saunders pointed to Target's assortment across departments, with products "desirable and affordable" and buoyed by its efforts in developing its private labels. Target has also managed to increase its digital sales without sacrificing profit, in part through in-store fulfillment of digital sales, which has the added benefit of driving traffic to stores.
"Looking ahead the outlook remains positive," Saunders said. "Target is a retailer that has its act together."