Strong initial sales of Target’s new private label food and beverage brand Favorite Day and “tremendous growth” of its Good & Gather line helped further lift the retailer’ grocery sales – contributing to a strong overall quarter in which comparable sales grew 8.9% on top of a record 24.3% growth in the same quarter last year and total revenue grew 9.5% to $25.3bn.
“The theme of this year’s performance has been growing on top growth,” which is possible thanks to the groundwork Target laid “years ago in our stores, owned brands, supply chain, technology and our team,” CFO Michael Fiddleke told investment analysts during the retailer’s quarterly call Aug. 18.
‘The growth in Drive Up is truly remarkable’
Among the investments paying off and boosting grocery is the development of Target’s curbside pickup program, Drive Up, which contributed nearly $1.4bn in dollar sales during the second quarter and, when combined with Target’s other same-day services – in-store pickup and Shipt – grew 55% this year on top of more than 270% last year, CEO Brian Cornell said.
“The growth in Drive Up is truly remarkable. … [It] is the single highest-rated service we have. But also, for us, it’s fast and very, very efficient, and we love the margin that comes along with those products,” and so we are growing the business, COO John Mulligan said.
Specifically, it added 5,000 items to the curated assortment available for pickup and Drive Up, including adult beverages, meal kits, pet food and greeting cards, he said.
“We also saw double-digit growth in our fresh categories, benefiting from an expansion in the number of items available for Drive Up,” added chief growth officer Christina Hennington. “In fact, nearly half of this year’s growth in our products business has been driven by growth in Drive Up orders.”
Target also improved Drive Up by adding functionalities such as backup suggestions when an item is unavailable and numbered parking spaces, some with covered tops for consumers to easily collect orders purchased through Drive Up, and the ability in the app to designate an alternate person to pick up an order, Mulligan said.
New private brand Favorite Day shows “encouraging results”
Beyond Drive Up, Target’s low double-digit grocery growth came from the reintroduction of several fresh categories and the introduction of new private label offerings.
“Performance was led by our bakery, café and deli businesses, which grew more than 50% as the departments were closed during part of the second quarter last year,” Hennington said.
She added that Target saw “tremendous growth” in its grocery brand Good & Gather and “encouraging results” from the introduction in March of its new brand, Favorite Day.
“We saw an increase in owned brand penetration of about 70 basis points compared with last year,” she noted.
A bright future
While predicting the impact of the delta variant on the future is difficult, Target executives said consumers are eager to return to store to explore aisle and try new products – across categories.
This energy, combined with the retailer’s performance to date, “gives us increasing confidence that this fall our business can generate comparable sales growth in the high single-digit range, near the high end of our previous guidance,” Fiddelke said.
“We have a similar outlook regarding profitability. Ninety days ago, we said we expected our full-year operating margin rate would be well above the 2020 rate of 7%, with a potential for it to reach 8% or somewhat higher. From today’s perspective … we expect to see an operating margin rate near the high end of our previous range,” and “we now believe that Target is positioned to deliver an operating margin rate of 8% or higher for the full year,” he added.