Online sales growth of nearly 20% year over year in the third quarter for Target Corp. proved to be disappointing news for the retailer.
Target, No. 16 in the Internet Retailer 2015 Top 500 Guide, reported that digital sales accounted for 2.7% of overall revenue during the third quarter ended Oct. 31, or $475.6 million. That’s up 19.9% from $396.8 million during the same time last year, when digital sales accounted for 2.3% of the company’s overall revenue and far short of the company’s online sales growth expectations during the quarter.
“While significantly outpacing the industry, this performance was well below our expectation of 30% growth, which we outlined in the last call,” Target CEO Brian Cornell told analysts on the retail chain’s Q3 2015 earnings call, according to a transcript from Seeking Alpha. “As we look at the drivers of this performance, it’s clear the third-quarter softness in electronics was particularly impactful online. And like our stores, digital sales growth in apparel was slower during much of the quarter, correlating with the relatively warm weather across much of the country.”
Growth in online sales accounted for 21.9% of the company’s overall growth during the quarter.
Cornell said Target planned to triple the number of stores used to fulfill online orders, adding more than 300 stores to the program during the recent quarter. With those stores serving as mini fulfillment centers, the company is plans to rely more on stores to fulfill online holiday orders.
“This will enable about 40% of digital transactions to be shipped from our stores in the fourth quarter,” he said. “In addition, two new direct-to-guest fulfillment centers became operational in the third quarter, in advance of the holiday season. With the expanded capacity these changes provide, we expect to continue making progress on shipping speed next year.” In late October, Target announced it would offer free shipping on all online orders through Christmas regardless of order size.
Year to date, e-commerce has accounted for 2.8% of Target’s overall revenue, or $1.460 billion. That’s up 30.5% from $1.119 billion during the same time last year, when e-commerce accounted for 2.2% of its overall revenues. Through the first nine months of 2015, e-commerce has accounted for 26.4% of the retailer’s overall growth.
Cornell told analysts that the vast majority—more than 80%—of the retail chain’s shoppers start their shopping online, a big reason why Target continues to invest in its digital operations.
“Regardless of where our guest demand is ultimately fulfilled, in a store or on a guest’s front porch, we know the vast majority of our sales in all of our channels are digitally enabled,” he said. “We don’t think that digital is simply a selling channel, but a critical enabler of the shopping experience in all of our channels.”
Analysts say marrying Target’s stores with the online shopping process will be key to the company’s growth.
“A more flexible and local approach to store formats will allow Target to improve its e-commerce operation by creating points of collection for online orders,” said Neil Saunders, managing director at Conlumino. “Gains from such an initiative are clearly some way off, but we believe that this is a longer term benefit that the company should look to exploit.”
For the third quarter ended Oct. 31, Target reported:
- Net revenue of $17.613 billion, up 2.1% from $17.254 billion during the same time last year.
- Revenue from stores of $17.137 billion, up 1.7% from $16.857 billion.
- Net earnings of $549 million, up 56.0% from $352 million.
For the first nine months of 2015, Target reported:
- Net revenue of $52.159 billion, up 2.5% from $50.868 billion during the same time last year.
- Revenue from stores of $50.699 billion, up 1.9% from $49.749 billion.
- Net earnings of $1.937 billion, up 92.9% from $1.004 billion.