Mass merchant says inventory is sufficient for the holidays, but warns that supply chain woes will continue into 2022. Retailer also says rising labor costs are hurting, but promises to resist raising prices for shoppers.

Target Corp. grew its digital comparable sales 29% year over year in the third quarter ended Oct. 30, after growing 155% in Q3 2020, when the raging pandemic drove many shoppers to buy more online.

In its earnings release, Target said digital sales continue to be led by same-day services, including buy online pick up in store, curbside pickup and its paid, same-day delivery service Shipt. Sales fulfilled from these same-day services rose 60% in the quarter, following growth of more than 200% a year earlier.

“Both in-store pickup and Shipt grew more than 30% in the quarter,” Michael Fiddelke, executive vice president and chief financial officer, said in the company’s earnings call with analysts, noting that curbside sales, which Target calls Drive Up, were especially strong. “Drive Up grew more than 80% on top of more than 500% a year ago. Put another way, since 2019 sales through Drive Up grew more than 10 times for about $1.4 billion in the third quarter alone.”

Target is No. 6 in the 2021 Digital Commerce 360 Top 1000.

Comparable sales grew 12.7% in the third quarter, reflecting same-store sales growth of 9.7% year over year at physical locations, on top of 9.9% growth last year, and digital sales growth of 29%. Total revenue of $25.7 billion grew 13.3% compared with last year, driven by sales growth of 13.2% and a 22.3% increase in other revenue, including $184 million in profit-sharing income under a credit card program agreement with TD Bank.

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The mass merchant increased its forecast for the holiday season. For the fourth quarter 2021, Target expects high single-digit to low double-digit growth in comparable sales, compared with the previous guidance of a high single-digit increase. The retailer had previously forecast expansion in the high single digits for the second half of the year. The company continues to expect its full-year operating income margin rate will be 8% or higher.

Online sale as a portion of total sales rose slightly to 17.6%  in Q3 compared with 15.7% digital penetration in the third quarter of last year.  But physical stores played a crucial role even here. A whopping 96.7% of total sales were fulfilled by stores, either through in-store purchases, buy online pick up in store or Shipt.

Supply chain pressures to continue

On a negative note, Target warned that it faces increasing cost pressures, particularly in labor and its supply chain. Gross margin, which is widely seen by analysts as a measure of pricing power, fell to 28.0% in the third quarter from 30.6% a year earlier, on higher costs associated with freight and merchandise, increased inventory shrink, and higher compensation and headcount in the retailer’s distribution centers. Analysts had been expecting 29.9%, based on the average of analyst estimates compiled by Bloomberg.

“We’ve certainly seen supply chain challenges going all the way to the start of the pandemic as demand in the U.S. continues to build,” Brian Cornell, chairman and chief executive officer of Target, said in the earnings call. “Our teams have shown great agility. They’ve adjusted to the marketplace to make sure that we’ve been able to meet the demand in our system, but we don’t expect those supply chain challenges to go away as we go into the start of next year.”

Target has taken steps to mitigate the problems caused by the global supply-chain crisis, most notably by unpacking containers in off-peak hours and rerouting shipments away from the congested ports of Los Angeles and Long Beach.

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“There’s still uncertainty as we think about supply from Asia as different factories from time to time are closed,” Cornell said.We’re just going to have to show great flexibility and agility to receive the products that our guests are looking for and our system requires.”

Supply chain uncertainty put pressure on Target’s pricing. But the retailer says it is working to limit the impact on shoppers. “We’re definitely protecting price,” Fiddelke said in the earnings call. “We’re seeing cost increases that are higher than our retail increases.”

Target’s inventory

The retailer said inventory rose 18% during the third quarter, noting that it has managed to secure sufficient goods for the holiday season, and that it expects to be able to meet shoppers’ expectations.  Industry watchers say that will prove crucial to the mass merchant’s ability to keep its customer base.

“Target is proving to its customers that it is paying attention to their needs and preferences,” says Gregory Ng, CEO of Brooks Bell, a digital analytics and optimization consultancy. “Providing a reliable inventory with a limited price increase may be affecting their short-term margins, but the long-term effects with customer loyalty will be worthwhile.”

For its third quarter ended Oct. 30, 2021, Target reported:

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  • Total sales grew 13.3% to $25.29 billion from $22.33 billion last year.
  • Net earnings rose to $1.49 billion, up 47.5% from $1.01 billion a year earlier.
  • Digital sales accounted for 17.6% of total sales, up from 15.7% a year earlier.

For the first nine 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 80.8% to reach $5.40 billion, up from $2.99 billion a year earlier.
  • Digital sales accounted for 17.7% of total sales, up from 16.1% a year earlier.

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