Retail giant Target plans to keep expanding its distribution real estate as a push toward cheaper and faster deliveries contributed to its first increase in comparable sales in five quarters.
The company is adding to its network of sorting centers to support digital purchases, same-day orders and pickup services as more customers head online to shop despite headwinds from inflation. Comparable sales rose 2% as of the end of the second quarter, as digital sales gained 8.7%, far outpacing the gain of in-store purchases at 0.7%.
The Minneapolis-based retailer plans to continue to ramp up capacity at its 10 existing sorting centers spread out between Minnesota, Texas, Colorado, Illinois, Georgia, Florida and Pennsylvania, and find new ways to integrate them into its broader distribution network, said Chief Operating Officer Michael Fiddelke on a call to discuss its earnings.
Combined, he said, the "centers have processed 19% more packages than a year ago."
The company plans to open its 11th sorting center in Detroit this month, which is expected to serve 3 million consumers and be able to handle 60,000 packages daily by 2028, Fiddelke said. Opening a sorting center in a market frees up processing space in the stores it serves and local orders arrive a day faster with 20% lower delivery costs than the network's average, he added.
Target dealt with several weather-related challenges at its properties in the second quarter. The company sustained major damage at its perishable food distribution facility in Denton, Texas, from a severe storm in late May, resulting in a prolonged closing and significant product loss at the location, Fiddelke said.
In early July, Hurricane Beryl hit landfall in Southern Texas, and Target lost power at multiple locations but was able to keep stores open using generators, Fiddelke said.
Adding Stores
Target said it has a total of 1,966 stores, up by 10 from the first quarter after adding three small-format stores that are less than 50,000 square feet and seven stores that are between 50,000 square feet and 169,999 square feet. The company added that it plans to keep focusing on inventory management and reliability, as well as speed and convenience, which it said helped increase profit and sales.
Net earnings rose to $1.19 billion from the year-earlier $835 million as revenue gained 2.7% to $25.5 billion, driven by multiple guest-focused initiatives the company outlined in March. Target's shares were up more than 10% in mid-day trading on the news.
"Consumers have shown remarkable resilience in the face of multiple challenges over the last several years," said Brian Cornell, Target's chair and CEO, on the earnings call. "Given the significant headwinds they faced with inflation over the last few years, consumers continue to focus on value as they work hard to manage their household budgets ... many are delaying purchases until the moment of need.”
Target relaunched its Target Circle rewards program this year with a paid membership option, Target Circle 360, that provides same-day services. Nearly 2 million new customers signed up for the Target Circle rewards program during Target Circle Week, a week-long sales event similar to Amazon's Prime Day, and two-thirds of transactions during the week were made by Target Circle members, Cornell said.
Even so, while Target has ended its “losing streak,” the company’s numbers “have been delivered off the back of a very soft prior year,” and revenue “remains down by 2.5% over the same period in 2022,” said Neil Saunders, managing director of data analytics firm GlobalData, in a note to clients. “In our view, this underlines the fact that while Target is now headed in the right direction, it has much more to do to get back into the winners’ enclosure.”