Target’s sales growth slows in the second quarter, hinting that the heightened consumer demand ushered in by the pandemic may be waning.

Target Corp. grew its digital comparable sales 10% year over year in Q2 after growing them a staggering 195% in Q2 of 2020.

In its earnings release last week, Target said digital sales continue to be led by same-day services, including buy online, pick up in store, curbside and its same-day delivery service Shipt. Sales fulfilled by these services grew nearly 55% this year, on top of more than 270% last year. Specifically, curbside sales, which Target calls Drive Up, grew more than 80% in Q2 2021 after increasing more than 700% in Q2 of 2020. BOPIS grew more than 30% year over year after increasing more than 350% a year earlier. And Shipt grew about 20% on top of more than 60% growth.

“Drive Up has quickly grown to be the largest, accounting for more sales than pickup (BOPIS) and Shipt combined,” said CEO Brian Cornell on an earnings call transcript obtained by Seeking Alpha. “To put it in dollar terms, over the last two years, second-quarter sales through Drive Up alone have increased by nearly $1.4 billion.” Target is No. 6 in the 2021 Digital Commerce 360 Top 1000.

Total sales grew 9.4% to reach $24.83 billion, up from $22.67 billion a year earlier. Digital sales reached $4.22 billion, accounting for 17% of total sales. Net earnings totaled $1.82 billion, up 7.4% from $1.70 billion a year earlier. Same-store sales, a key measure of retail performance, rose 8.9%.

The percent of total sales from the digital channel fell slightly to 17% from 17.2% in Q2 2020. “Obviously, this isn’t a trend we expect will continue over time, and it’s important to note that this year’s digital penetration of 17% is well over double the 7.3% we reported in the second quarter of 2019,” said Michael Fiddelke, executive vice president and chief financial officer, on the call.

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Visits to stores and its website rose about 13% in the quarter, reflecting customers’ increasing comfort regarding venturing into public places compared with last year. While shoppers returned to physical locations in what the company described as “droves,” online revenue growth cooled off. Still, Cornell noted that more than 95% of total sales were fulfilled by stores—a testament to the company’s investments in integrating its 1,900 locations into the online supply chain.

Target turns to higher-margin items as sales growth slows

Target has benefitted during the pandemic, as demand soared for groceries, home goods and more. But as the chain goes up against the strong performance from 2020, it hasn’t outperformed expectations to the extent it did last year. “With a very strong core business and a run of success, the key challenge for Target is to continue generating strong revenue growth,” Neil Saunders, managing director of GlobalData, said in a note. The company is looking to categories such as beauty to maintain what has been “impressive” growth, he said.

As rising COVID-19 cases fueled by the contagious delta variant put new pressure on consumer confidence, the retailer’s leader is sanguine about the company’s prospects. “We continue to see a very optimistic guest,” Cornell said. There hasn’t been a noticeable shift in behavior since customers “use caution as appropriate,” he added.

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One rising concern is how much consumer spending is being helped by short-term government stimulus, such as the monthly payments to families related to child tax credits. “You wonder what’s the true margin profile of this business as they move into 2022?” said Brian Yarbrough, an analyst at Edward Jones. The company’s bottom line has also been boosted by fewer markdowns because demand is so strong, he said. “At some point, that reverses itself.”

Target said in May that it would increase profitability this year because it’s selling more higher-margin items, such as clothing, and sales would rise despite the tough comparisons. In the second quarter, apparel was the best performer of its five core categories, notching double-digit growth.

Target bets big on back-to-school

Back-to-school is a crucial shopping period for Target and other chains, which largely missed the boost last year amid remote learning during the pandemic. The season still has several weeks to go, and Cornell said it’s gotten off to a strong start. “If you look at our traffic numbers, it tells me we have a very resilient consumer,” he said. “Right now, we’re not seeing any adjustment to consumer behavior.

To aid back-to-school shoppers, Target launched School List Assist. The feature, online and in the Target app, enables consumers to easily find their school-specific supply list and either shop by item or add the whole list in one click.

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Executives on the call said the retail chain is also rolling out technology enhancements, including functionality to provide backup suggestions when an item ordered for BOPIS, Shipt or curbside is unavailable, a chain-wide rollout of numbered parking spaces for guests using Drive Up, and the ability to designate an alternate person via its app to pick up an order.

For its second quarter ended July 31, 2021, Target reported:

  • Total sales grew 9.4% to reach $24.83 billion, up from $22.70 billion a year earlier.
  • Net earnings totaled $1.82 billion, up 7.4% from $1.70 billion a year earlier.
  • Digital sales totaled $4.22 billion, up 8.2% from $3.90 billion a year earlier, accounting for 17% of total sales, down from 17.2% a year earlier.

For the first six months of 2021, Target reported:

  • Total sales grew 15.8% to reach $48.71 billion, up from $42.10 billion a year earlier.
  • Net earnings grew 98.2% to reach $3.91 billion, up from $1.97 billion a year earlier.
  • Digital sales grew 25.7% to reach $8.62 billion, up from $6.86 billion a year earlier, accounting for 17.7% of total sales, up from 16.3% a year earlier.

Percentage changes may not align exactly with dollar figures due to rounding.

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