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Target beats expectations; ready for holidays with inventory up nearly 20%

Target is in a good place as the holiday season approaches.

Target Corp. reported stronger-than-expected third-quarter earnings and sales and said it’s ready for the holidays as it remains focused on “protecting prices” for customers.

The discounter, similar to other major retailers such as Walmart and The Home Depot, chartered its own ships to deal with global supply chain congestion and ensure that merchandise arrived at stores and warehouses in time to meet holiday demand. 

On the company's earnings call, chairman and CEO Brian Cornell said that the company unloaded about 60% of its containers at off-peak times and utilized other ports across the country to try to release some of the congestion in L.A. Long Beach.  Its efforts have resulted in a nearly 20%, or $2 billion, increase in inventory year-over-year. (On Tuesday, Walmart said its U.S. inventory was up 11.5% ahead of the holidays.)

“With a strong inventory position heading into the peak of the holiday season, our team and our business are ready to serve our guests and poised to deliver continued, strong growth, through the holiday season and beyond,” Cornell said. 

Target’s net income totaled $1.49 billion, or $3.04 per share, in the quarter ended Oct. 30, up from $1.01 billion, or $2.01 per share, last year. Adjusted earnings per share of $3.03 beat analysts’ estimates for $2.82.

Revenue rose 13% to $25.65 billion from $22.63 billion, topping estimates from $24.61 billion.

Target posted a comp increase of 12.7%, which it said was driven entirely by traffic, was up 12.7%. Store comparable sales rose 9.7%, on top of 9.9% growth last year. Digital comp sales rose 29%, following growth of 155% last year. The retailer said that all five of its core merchandise categories delivered double-digit comparable sales growth, on top of strong sales performance last year.

Same-day services (order pickup, drive up and Shipt) grew nearly 60% this year, on top of more than 200% last year. More than 95% of the retailer’s third-quarter sales were fulfilled by its stores.

But higher freight and supply chain costs, along with higher prices, are putting pressure on Target’s margins. The company’s gross profit margins for the quarter narrowed by 2.6 percentage points to 28%.

In addition to supply chain disruption and labor shortages, inflation has emerged as a major challenge to retailers as they head into the holidays. Cornell told reporters that the company is absorbing some of the higher costs it is experiencing as opposed to passing them on to consumers.

“We are protecting prices,” Cornell told reporters. “It’s as important to our guests this year as safety has been throughout the pandemic.” 

Cohen sounded a similar note on the earnings call.

"The team has done a great job navigating through broader cost pressures as many vendors have raised wholesale prices to accommodate higher costs within their businesses," he said. "As our team face these cost increases, they maintained a guest-first approach and a focus on value while managing overall profitability as well."

Target launched its first holiday promotions in early October, adding a new price match guarantee. Earlier this week, it unveiled its official Black Friday deals.

“The holiday season is off to a great start, but we’ve got many weeks in front of us and think we’re going to continue to see that strength throughout the holiday season right up to Christmas Eve,” Cornell said.

Target and other retailers are facing a labor crunch during a holiday shopping season that is expected to see strong growth. The National Retail Federation expects sales to increase by 8.5% to 10.5% over 2020, totaling between $843.4 billion and $859 billion.

[Read More: Target to pay employees extra for working peak days of holiday season]

Target raised its fourth-quarter forecast. It now expects high-single digit to low-double digit growth in comparable sales, compared with the previous guidance for a high-single digit increase. The company continues to expect its full-year operating income margin rate will be 8% or higher.

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