Target’s Q1 sales surge amid strong online growth; COVID-19 costs cut into profit

Target Corp. reported a 10.8% increase in first-quarter comparable sales as its digital sales steadily accelerated during the COVID-19 crisis.

The discounter reported earnings and sales that beat Street expectations even as pandemic-related costs cut into its profit. Similar to other retailers that stayed open during the health crisis, Target has experienced higher labor costs, including higher pay and expanded benefits for employees, and also spent more money to sanitize its stores and distribution centers, protect its workers and ensure social distancing. In total, Target spent some $500 million on items directly related to the outbreak

On an earnings call with reporters, Target chairman and CEO Brian Cornell called those costs the new reality going forward.

“There is going to be a premium on creating a safe, sanitized shopping environment,” he said.  

Target’s net earnings fell 64% to $284 million, or $0.56 cents per share, compared with $1.53 in the year-ago period. Adjusted earnings per share were $0.59, compared with $1.53 in 2019. Analysts had expected earnings per share of $0.44. Operating income plunged 58.7% to $468 million in the quarter, down from $1.135 billion in 2019.

Sales rose 11.3% $19.6 billion, beating expectations of $19.02 billion. Total comparable sales rose 10.8%%, driven by a 12.5% increase in average basket as shoppers made fewer but bigger shopping trips. Store comparable sales increased 0.9%. Digital comparable sales jumped 141%. 

Target’s digital comp sales accelerated every month in the quarter, rising from 33% in February to 282% in April. Nearly 80% of Target’s digital were fulfilled by its stores. Same-day services (order pick up, drive-up and Shipt) grew 278% in the quarter and accounted for about 5% of total comp sales growth.

Target said it picked up market share across all five of its core merchandise categories during the quarter. Hardlines sales rose by more than 20%, fueled by strong growth in consumer electronics.  Food and beverage also grew by more than 20%. But apparel sales were down 20%. 

On the call, Cornell said shopping for discretionary items such as clothing started to pick up near the end of the quarter. He noted that April was also the best month of the quarter for Target, with same-store sales up by over 16% from the year-ago period. But the executive acknowledged the uncertainty that the pandemic has cast.

“Right now, we know that consumers are living differently,” Cornell said. “They’re shopping differently. They’re adapting to the new environment, so it’s really a time of uncertainty and it’s why we’re making sure we’re as flexible as possible.”

Similar to other retailers, Target withdrew its financial outlook for the full-year and first quarter in late March because of COVID-19.

“Throughout the first quarter, our team and guests faced unprecedented challenges arising from the spread of COVID-19,” said Cornell in a statement. “In the face of those challenges, our team showed extraordinary resilience as guests relied on Target as a trusted resource for their families. With our stores at the center of our strategy, and a significant investment in the safety of our team and guests, our operations had the agility and flexibility needed to meet the changing needs of our business.”