Target Sales Driven by Online Traffic
Still, aggressive promotions that drove that growth cost the retailer in terms of profitability
The big-box retailer posted comparable-sales growth of 1.9% for the fourth quarter, with more than two-thirds of that gain coming from the digital side as Target aggressively courted online shoppers with free shipping on all orders during the holidays and steep sitewide discounts, like 15% off all Cyber Monday purchases.
The promotions and overall efforts to improve merchandise and spruce up stores with better displays also brought more customers into stores for the fifth straight quarter, as Chief Executive Brian Cornell works to restore Target’s relevance with customers.
“We really believe that our playbook that we rolled out during the holidays drove traffic to our stores, drove traffic to our site,” Mr. Cornell said on Wednesday’s earnings call with analysts.
Target expects to continue to upgrade its stores’ appearance by better stocking shelves and adding employees to manage merchandise displays. The company forecast sales excluding newly opened or closed stores would rise at the same rate as last year, but executives are optimistic that growth rate will accelerate over time.
Those offers and other discounts for both in-store and web purchases hit gross margins, which fell to 27.9% for the quarter from 28.4% last year.
“Digital does have a little more challenged economics,” Target Chief Financial Officer Cathy Smith said on a conference call Wednesday.
Shoppers who started browsing online would often finish their shopping in stores, where sales are more profitable. Target Operating Chief John Mulligan said that 40% of online orders picked up in stores were for items that Target’s ran out of in its e-commerce shipping centers. “This preserved sales that we would have otherwise missed,” he said.
To offset the higher costs of online sales, Target is revamping merchandise in key categories that have higher profit margins like home goods, fashion and kids products. Target says it did well in those areas, with sales in its home department up 4%, the best in more than a decade, and apparel sales up at a low-single digit rate. Toys, meanwhile, rose double digits, helped by Star Wars items.
The performance topped rival Wal-Mart Stores Inc., especially online, where Target was much more aggressive with promotions. Wal-Mart, which required online shoppers to spend $50 on an order to get free shipping, last week reported that comparable sales rose 0.6% in the fourth quarter with 8% online growth.
Target’s online sales growth bested even longtime rival Amazon.com Inc., which posted a 24% increase in the fourth-quarter in North America. But Amazon.com’s e-commerce sales in North America are roughly 20 times as large as Target.com. Only 5% of Target’s $21.6 billion of sales in the quarter—or about $1 billion—were from its website and mobile platforms.
Target and other retailers are struggling to find a balance between pursuing rapid online sales growth, where customers are increasingly shopping, and protecting margins. Target is trying to push more sales of higher margin products like apparel and furniture online, and also using its stores as both pickup points and shipping hubs to cut down on costs.
For the quarter, Target reported a profit of $1.43 billion, up from a loss of $2.64 billion a year earlier when Target recorded losses from exiting its Canada business. Revenue declined to $21.63 billion from $21.75 billion, mainly due to the recent sale of its pharmacies to CVS Health Corp.
For the first quarter, Target forecast adjusted earnings per share of $1.15 to $1.25, tracking in line with analysts’ average estimates. For the full fiscal year, it called for an adjusted per-share profit of $5.20 to $5.40, up from $4.69 a year earlier and above Wall Street consensus for $5.16.