The retailer's web sales rose 41%, helped by Target slashing some next-day delivery fees, as well as promotions surrounding Amazon’s Prime Day in July.

(Staff and Bloomberg)—Target Corp. kept pace with rival Walmart Inc. by posting its best comparable-sales growth in 13 years.

Web sales rose 41% year over year in the second quarter, helped by Target slashing some next-day delivery fees and promotions surrounding Amazon’s Prime Day in July. The company said it will offer same-day delivery to about two-thirds of U.S. households by the holiday season, thanks to its acquisition of logistics specialist Shipt last year. Same-store sales rose 4.9%.

Two-thirds of the quarter’s growth was fulfilled out of stores, according to chief financial officer Cathy Smith. But fulfillment costs contributed to a drop in gross margin, down to 30.3% from 30.4% during last year’s second quarter. The margin compression, reflecting the company’s investments online and in stores, “is the short-term pain for the long-term gain,” Charlie O’Shea, an analyst at Moody’s Investors Service, said in a note.

Comparable sales, including stores and online, rose 6.5% in the latest quarter, the company said Wednesday, beating analysts’ average prediction, according to Consensus Metrix. Web revenue growth also accelerated from the first quarter of the year.

Target CEO Brian Cornell has unveiled more than a dozen new store brands in categories like apparel and home decor over the past year to get customers excited about shopping at the cheap-chic retailer again, and he’s expanding services like same-day delivery and curbside pickup to make online ordering more convenient. Those efforts paid off in the quarter, with customer visits rising at the fastest pace ever recorded.

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“Clearly the strategy is working,” Joe Feldman, an analyst at Telsey Advisory Group, said in an interview. “There is a lot to like about the quarter. The phenomenal traffic number was a standout to me.”

Along with Walmart and other retailers, Target benefited from pent-up demand early in the quarter after unseasonably cold and wet April weather kept shoppers at home. There was also an extra week of back-to-school spending in this year’s second quarter, analysts said, compared with the same period a year ago.

Market share gains

“There is no doubt we benefit from a strong consumer environment, perhaps the strongest I’ve seen in my career,” Cornell said on a conference call. “But it’s more than just that as we see broad market share gains across all our major categories.”

U.S. consumer sentiment advanced to a 17-year high earlier this month, elevated by rosier views of the economy and personal finances, according to the Bloomberg Consumer Comfort Index. Confidence continues to strengthen amid a tight labor market and robust economic growth, with consumers also enjoying tailwinds from tax cuts.

Still, Target. No. 17 in the Internet Retailer 2018 Top 500, faces tough competition from the likes of Kohl’s Corp. (No. 18) and Walmart (No. 3), which both bested analysts’ sales estimates in the latest quarter, and Amazon.com Inc. (No. 1), which continues to encroach on Target’s clothing and back-to-school sales. A key battleground in the back half of the year will be the toy aisle, where all three retailers will look to grab shoppers in the wake of Toys R Us Inc.’s demise.

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“We’re on track to deliver a strong back half and we’ve updated our full year guidance to reflect the strength of our business and the consumer economy,” Cornell said in a statement.

The company now sees full-year adjusted profit of $5.30 to $5.50 a share, up from an earlier range of $5.15 to $5.45. Comparable-store sales in the second half of the year will rise in line with the 4.8 percent gain in the first half, Target said.

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