Target just set new digital record — at a price (TGT)
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Target reported earnings for its fiscal Q3 2018 (ended November 3, 2018), revealing that its sales grew 5.7% year-over-year (YoY) to almost $17.6 billion. The retailer’s digital sales rose 49% YoY, the strongest performance it's ever reported in the metric, Target CFO Cathy Smith said on the company’s earnings call.
This is an acceleration from the 41% YoY increase it posted in the metric a quarter prior, and more than doubles the 24% YoY growth it saw a year ago in its fiscal Q3 2017. The channel still only accounts for 6% of Target’s total sales, but that’s up from 4.2% from the comparable period a year ago.
CEO Brian Cornell attributed the growth to Target’s efforts to make its online shopping seamless, selection attractive, and fulfillment options convenient, he said on the earnings call.
But Target’s gross margin dipped during the quarter, and the increase in digital sales was chiefly responsible. It dropped to 28.7% from 29.6% in Q3 2017, and the biggest contributing factor was the cost of fulfillment for its surging digital sales, Smith said. Higher digital sales growth is extremely valuable, but if Target can’t handle its rising order volume without costs rising to problematic heights, the e-commerce boost may be more trouble than it's worth.
Target needs to find ways to minimize its digital fulfillment costs, especially for the holiday season.In its fiscal Q4 2017, Target brought in over $1.8 billion in digital sales, a tremendous volume to handle. If that total grows even 40% in 2018, it’ll surpass $2.5 billion, which could be extremely costly for Target to handle, particularly because it’s offering free two-day shipping with no order minimum to drum up business for the holidays.
The retailer is working to automate and optimize its inventory, but those efforts to better handle fulfillment are in their early stages, Cornell said. In the meantime, Target will need to look to its less expensive existing options, which may be possible because its ship-from-store volume more than doubled in Q3, while other options held steady, COO John Mulligan said on the call.
He also added that in-store pickup accounts for 15% of Target’s digital volume, and both of these options can be more affordable for Target because they shave off parts of the delivery process. If its free two-day shipping holiday offering proves extremely popular, Target may find its fulfillment costs reaching new heights, but it will welcome the accompanying digital growth.
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