Target's margins also improved as 80% of the retailer's online sales growth came from economical fulfillment options, such as in-store pickup and Drive Up curbside delivery.

Target Corp.’s investments in ecommerce and same-day fulfillment options helped boost the retailer’s online sales 31% in the third quarter over the same period a year earlier. And, importantly, the rise in ecommerce sales didn’t weigh on profitability as it had in previous periods. The retailer’s gross margin compared with a year earlier expanded for the second straight quarter.

In addition to better-than-expected apparel, jewelry and shoe sales, Target’s margins improved, as 80% of the retailer’s online sales growth came from economical fulfillment options. Those include in-store pickup and Drive Up curbside delivery. It is far more cost-effective for the retailer to fulfill shopper’s online orders in its stores than to ship them, said Michael Fiddelke, Target’s executive vice president and chief financial officer, during a conference call with analysts.

Those fulfillment options are also convenient for shoppers, which is why they’re growing quickly, said CEO Brian Cornell. The retailer expects that it will handle more packages via its three same-day fulfillment options—in-store pickup, curbside delivery and its Shipt same-day delivery service—in the next five weeks than it did in all of 2015.

That would continue the rapid growth of these services. In the third quarter, Target’s sales volume fulfilled by curbside delivery grew more than 500% compared to the same period a year earlier, Shipt deliveries grew more than 100% and in-store pickup grew more than 50%, said John Mulligan, the retailer’s executive vice president and chief operating officer.

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While a portion of the growth for curbside delivery was driven by the addition of more than 800 locations, compared with a year ago, more than half of the growth occurred in mature locations. “More and more guests in those markets tried the service, loved it and chose to use it again and again,” he said.

Target’s success driving shoppers to its same-day delivery options stems from a plan the retailer mapped out in 2017. The plan put stores at the center of its strategy for adapting to the changing ways consumers shop. The retailer has renovated roughly 300 stores a year while opening scores of smaller-format locations.

“We’re investing in our business with a long-term view of years and decades, not months and quarters,” Cornell said at the time. “We’re putting digital first and evolving our stores, digital channels and supply chain to work together as a smart network that delivers on everything guests love about Target.”

Since that initial push, the retailer has spent more than $10 billion on initiatives related to this strategy. Leveraging its large store base makes sense for Target, Cornell said, because roughly 75% of Americans live within 10 miles of a Target store.

The plan is working, says Charlie O’Shea, an analyst at Moody’s. “Target continues to validate the efficacy of the strategic initiatives it outlined in February 2017,” he says.

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Target’s financial results

Overall, the retailer’s third-quarter comparable sales, a key retail metric, rose 4.5%, a full percentage point above what analysts had projected in a poll by Consensus Metrix. Profit this year, excluding some items, will be between $6.25 and $6.45 a share, Target said Wednesday.

The blowout performance distanced the U.S. cheap-chic retailer from struggling rivals like Kohl’s Corp., which on Tuesday cut its full-year profit forecast for the second time in 2019 on sales that trailed projections. Even Walmart Inc. stumbled this quarter due to weakness at its Sam’s Club warehouse division. In contrast, Target has et itself apart by opening smaller locations in urban areas, introducing a steady stream of new store brands and expanding the number of ways customers can get their orders.

“From top to bottom, this is a strong report,” Brian Yarbrough, an analyst at Edward Jones & Co., said. “[Target is] really back at the top of its game and taking market share from a lot of the weaker players.”

Weak apparel sales had hurt Kohl’s and Walmart in the quarter, but Target didn’t suffer the same fate, with apparel and accessories delivering growth of more than 10%, the company said.

Betting on the holidays

The retailer has made a big bet on toys this holiday season by opening more than two dozen mini-Disney stores inside some of its locations and fulfilling sales made on the relaunched Toys R Us website. Target has a high bar to clear, though: Last year’s holiday sales rose 5.7% (and its online sales rose roughly 31%). To continue that growth, the retailer has brought in 10,000 new and exclusive toys to entice shoppers, and has boosted its holiday payroll by $50 million.

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This holiday season could be lackluster one for retailers, according to Bloomberg Economics, with sales projected to grow just 3.4%, which would be below the projections from the National Retail Federation. Last year, Target and others benefited from the demise of Toys R Us, which created opportunities to grab sales in categories like toys and baby products. This year, it won’t be as easy, especially as the selling season is compressed, with six fewer days between Thanksgiving and Christmas compared with 2018.

For the fiscal quarter ended Nov. 2, Target, No. 16 in the Internet Retailer 2019 Top 1000, reported:

  • Net sales of $18.414 billion, up 4.7% from $17.590 billion during the same time last year.
  • Digital sales growth of 31%, compared with 49% growth a year earlier.
  • Comparable sales gain of 4.7%, compared with 5.1% a year earlier.
  • Net earnings of $714 million, up 14.8% from $622 million last year.

For the first three quarters of the year, Target reported:

  • Net sales of $53.997 billion, up 4.4% from $51.699 billion.
  • Net earnings of $2.447 billion, up 14.4% from $2.139 billion.

Bloomberg contributed to this report

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