10 Reasons Why Target Will Crush It this Holiday Season and Beyond

Target reported a remarkable third quarter, causing the retailer to raise its profit outlook for the year after crushing analysts’ estimates. 

As it heads into the holidays and 2020, Target is set up win shoppers over through its ongoing investments and initiatives. The retailer said it now expects full-year adjusted profit of $6.25 to $6.45 per share, up from its prior range of $5.90 to $6.20 per share.

"Our third quarter results are further proof of the durability of our strategy, as we’re seeing industry-leading strength across multiple metrics, from the top line to the bottom line,” said Target’s chairman and CEO Brian Cornell. “Looking ahead, we have ushered in the holiday season with an unwavering commitment to guest service that complements our highly differentiated, value-driven assortment, our exceptional in-store shopping experience as well as an unmatched suite of easy and convenient fulfillment options.”

The retailer has plenty of reasons to be confident this holiday season, as its style and essential categories are performing, stores are driving growth, and digital channels are continuing to accelerate. Here we examine ten ways Target is leading the retail rebound.

Store Fulfillment Savings

Target’s digital sales surged 31% in the quarter, with its same-day services accounting for 80% of that growth, which include Drive Up, same-day delivery via Shipt, and buy online, pick up in store (BOPIS). Given that these same-day options rely on Target’s store assets, team and inventory, they are much more profitable than traditional e-commerce fulfillment, Cornell said in the recent earnings call.

When Target fulfills an online order from the back of its stores versus shipping from a distribution center, “about 40% of the cost goes away,” he noted said during an interview on “Squawk Box." When customers order online and pick up at a store, use curbside pickup or select shipping via Shipt, “about 90% of the cost goes away.”

Remodels

In the quarter, Target completed another 153 store remodels, putting it at just under 300 for the year. Target has found ways to reduce the sales disruption that occurs in stores undergoing a remodel, driving a notable improvement in the average disruption compared with last year.

“We continue to see remodel sales lifts in line with our assumptions, and we see a meaningful second year lift that wasn't originally part of our modeling for these projects,” said COO John Mulligan. “We plan to maintain our current pace of remodels for one additional year in 2020, and then ramp down to a longer term pace of 150 to 200 per year, beginning in 2021.”

Target’s New Loyalty Program

The fourth quarter will benefit from the retailer’s new loyalty program, Target Circle, which launched nationwide last month. “Even though the program is brand new, Target Circle already has more than 35 million members, making it America's fastest growing loyalty program,” said Cornell. During an 18-month test period, shoppers who enrolled in Target Circle shopped more frequently and spent 2% to 5% more than shoppers who weren’t in the program.

Same-Day Growth

In the quarter, the slowest growing of the same-day services was BOPIS, which still grew more than 50%. Target sales volume fulfilled by Shipt grew more than 100%, and Drive Up saw growth of more than 500%.

“Obviously, a portion of the growth for Drive Up was driven by the addition of more than 800 locations, compared with a year ago,” Mulligan said, but noted “more than half of the growth occurred in mature locations, as more and more guests in those markets tried the service, loved it and chose to use it again and again.”

Inventory Enhancements

Target is continuing to modernize its supply chain by investing in the development of a new inventory planning and control system, which is designed to deliver enhanced precision in the placement and positioning of inventory throughout the supply chain. The benefits of such include lower backroom inventory levels, better on-shelf availability of store inventory, and a higher percentage of replenished items that flow straight to the shelf. The new system is currently active on approximately 15% of Target’s assortment, representing 20% to 30% of total replenishment that flows to stores.

“For the items being managed by this new system, we're seeing favorable outcomes including lower out of stocks and lower levels of backroom inventory,” said Mulligan.

DC Automation

Target is testing and rolling out distribution center automation. This new technology is focused on moving sortation labor out of store backrooms, organizing shipments to minimize the number of footsteps needed to restock sales floors, and reducing the amount of excess inventory in backrooms.

“We've been testing this new technology, which is integrated into a new warehouse management system in our Twin Cities DC this year,” said Mulligan, “and based on learnings and encouraging early results, we plan to extend the test into several other facilities next year.

Small Format Promise

Target opened seven small format locations in the third quarter, plus another six in November, and sales from this year's entire group of new stores are running ahead of Target’s plan. The retailer plans to continue opening 30 of these smaller stores per year, as it has found they drive shopper engagement and deliver strong financial performance, including much higher than average sales productivity and meaningfully higher gross margin rates compared with Target’s larger format stores.

Productivity Increases

Mulligan said Target will pick, pack and deliver more packages in the next five weeks than it did in the entire year of 2015. This year Target has seen productivity increases in pick, prep, pack and ship of close to 60% in-store.

“We think, it is a huge strategic advantage for us, given the speed we see and the cost advantages we see by fulfilling through our stores,” he noted.

Apparel is Booming

The competitive category of apparel saw the most dramatic share gains in the quarter, with comp sales growth of more than 10%, a good sign for the retailer. This was driven by even stronger trends in jewelry, accessories and shoes, intimates and sleepwear, young contemporary and women's ready to wear.

Limited-Time Offers

Target’s 20th Anniversary Collection brought 300 limited-edition shopper favorites back in September. Cornell said it built enormous awareness and traffic to stores and that limited time offers will be part of Target’s playbook as it heads into 2020 and beyond.