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Target's Digital Sales Surge, Operating Margin a Concern

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The coronavirus outbreak has highlighted a paradigm shift in consumer buying behavior. People are shopping essential items rather than making discretionary purchases. Further, as social distancing becomes the norm of the day, the industry players have been focusing on bolstering omni-channel operations and ramping up delivery services to meet customers’ needs. Target Corporation (TGT - Free Report) being fully aware of the prevailing circumstances is well equipped to serve shoppers be it curbside pickup or delivery at home.

Target has registered a sharp rise in comparable sales during the first quarter so far, courtesy of booming digital sales as consumers shop for essentials from home amid lockdown. Digital sales started to shoot up in the later part of the March month. The trend continued in April as well but accelerated significantly from the middle of the month. The company witnessed higher demand for same-day fulfillment services and saw market-share gains across core merchandising categories. However, it cautioned on first-quarter profit citing a number of factors.

Undoubtedly, the company is committed and sensitive toward its employees as much as it is toward customers during the time of this pandemic. Management informed that it will extend $2-an-hour temporary wage increase until May 30.

Shares of this Zacks Rank #3 (Hold) stock have fallen 4.8% in the past six months compared with industry’s decline of 8.5%.



 

Let’s Introspect

Quarter-to-date, comparable sales have risen more than 7% versus 1.5% reported in the final quarter of fiscal 2019. This reflects a marginal fall in sales at stores but more than 100% growth in digital channels. Notably, comparable sales across the company’s core merchandise categories increased more than 20% in Essentials and Food & Beverage, over 16% in Hardlines and slightly in Home. However, the retailer’s Apparel & Accessories performance remained soft, as comparable sales in this category tumbled more than 20% year over year.
  
So far in the month of April, Target has registered comparable sales growth of more than 5%, reflecting digital comparable sales improvement of over 275%. However, we note that comparable-store sales have declined in the mid-teens. Mentioning of core categories, the metric has improved more than 12% in both Essentials and Food & Beverage, more than 30% in Hardlines and in the high teens in Home. As usual, comparable sales across Apparel & Accessories category plunged more than 40%.

Talking about the company’s performance in March, comparable sales rose in the low-double digits. This reflected mid-single digit increase in stores and more than 100% jump in digital channels. During the month of February, the company witnessed an increase of approximately 3.8% in comparable sales.

Management remains wary of persistent decline in higher-margin discretionary items’ sales, which may hurt margins. The company, which called-off its first-quarter guidance on Mar 25, also highlighted various factors that will hurt quarterly profitability. These include investments in pay and benefits for frontline team members, shift in channel mix toward digital fulfillment, transition in category mix toward lower-margin categories, and inventory write-downs in Apparel & Accessories due to sharp deceleration in sales trends. Management stated that cumulatively these factors are expected to hurt operating margin rate by more than 5 percentage points.

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