Target Handles Q1 Surge in Digital Volume
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On an average day in April, Target Corp. noticed what amounted to an unexpected surge: It was fulfilling many more items and orders than last year’s Cyber Monday — a day for which it said it had planned months ahead of time.
“And by design, it was our stores that enabled the surge in digital volume, fulfilling more than 80% of our digital sales in April,” amid the novel coronavirus pandemic, CEO Brian Cornell said during the company’s fiscal-year, first-quarter earnings call May 20.
At the same time, Target reiterated it is moving forward on its planned expansion of smaller sort centers. They are intended to increase throughput, independent of its stores, in select markets with a high density of packages being delivered to customers’ homes. To support that move, it recently acquired local route-optimization technology and hired key staff from Deliv, which ceased operations.
Mulligan
“We are excited about this new [Deliv] technology because it offers the opportunity to add capacity to our fulfillment network while also reducing the cost of last-mile delivery,” Target Chief Operating Officer John Mulligan said. “And given that last mile is the biggest cost driver within digital, the opportunity to control those costs will play an important role in our operating margins over time.”
Target is planning to test the first of these centers in the Minneapolis market, where it is headquartered, and plans to follow “our normal discipline of testing and iterating before we decide to scale up,” Mulligan added.
Meanwhile, Target said plans to expand its use of automation in warehouses to fill boxes with items for specific aisles in stores, to improve restocking, is on hold amid travel restrictions related to the pandemic.
“But when we are able to do that, we’ll get that to four more locations this year [around Minneapolis] and then continue to expand out of Perth. The teams have made great, great progress here even while we haven’t been able to get into that building,” Mulligan said. “So you’ll see us continue to expand automation.”
Perth is about 100 miles away from Minneapolis.
The company made the announcements during its earnings call.
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Net income for the period ended May 2 fell 64.3% to $284 million, or 56 cents per share, compared with $795 million, or $1.53, a year earlier. Revenue increased 11.3% to $19.3 billion compared with $17.4 billion a year earlier.
“Unprecedented volatility within the quarter presented the most extreme test of our business and operations that I could have imagined,” Cornell said.
More than 5 million “guests” shopped on Target.com for the first time during the quarter, he said, and more than 2 million of them made their first trip to Drive-Up, Target’s most popular service — where sales increased nearly 1,000% compared with a year ago.
All of that meant digital fulfillment and supply chain costs climbed, as digital penetration more than doubled compared with last year, driving nearly 10 percentage points of its sales growth.
Also, a severe slowdown in apparel sales meant hundreds of millions of dollars of incremental costs, including inventory impairments.
Pressure on profits also came from a wide divergence in sales trends across its business, it reported.
Its three lowest-margin categories, hardlines, essentials, and food and beverage each saw first-quarter comparable increases in the high teens or higher.
In contrast, its two highest-margin categories, home and apparel, saw slower trends, with home in the high single digits and the apparel decline of more than 20%.
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