Thanks to shoppers crowding stores while still embracing digital channels, Target's comp sales growth was entirely fueled by traffic, the retailer said Wednesday. Store comp sales rose 8.7% and digital comp sales, which shot up by 195% last year, rose 10%.
As sales and profits grew, Target bought back $1.5 billion worth of its own shares in Q2 after suspending stock repurchases for most of 2020 because of pandemic uncertainty. The retailer announced Wednesday a new $15 billion stock buyback program approved by its board that is set to begin after Target's current $5 billion repurchase program is complete.
During its recent call with investors and analysts, Target executives repeatedly emphasized this year's theme of "growth on top of growth" in its financial results.
Though Target's growth has now begun to dial down to single digits since last year's pandemic-driven results, the company still reported total revenue growth of 9.5% to $25.2 billion this quarter. Operating income rose 7.2% year-over-year to $2.5 billion.
Back-to-school spending started off strong, a positive result that Target expects to continue through Q3. Comp sales for all five of Target's core merchandising categories rose this quarter, with owned brand sales up in the mid-teens category. Target executives also said during the call that customers have been going out to shop for a smaller bulk of items compared to last year.
Following the second quarter report, the company now raised its fiscal 2021 guidance. Target expects comp sales to show high single digit growth — close to the higher end of its last estimate. The retailer also expects operating income margin rate this fiscal year will be 8% or more.
"Guests have emerged from a year in which digital was the primary growth driver. And they're now returning to our stores in droves," Brian Cornell, chairman and CEO of Target, said during the call. "Traffic accounted for more than 100% of our second quarter growth. In contrast to a year ago, when guests were living out of their home, and the bulk of our growth is coming from bigger transactions."
Digital sales this quarter are led by same-day services (Order Pickup, Drive Up and Shipt), which rose a modest 55% in contrast to its 270% growth in 2020.
"Online remains a meaningful bright spot, with 10 percent growth on top of Q2 2020's almost 200% growth, and Shipt remains a powerful asset in this capability," Moody's Vice President Charlie O'Shea said in emailed comments.
In recent years, Target has been using partnerships and private labels to gain market share in certain categories. For instance, its most recent private label, Kindfull, focuses on cat and dog food as the pet category skyrocketed during the pandemic. Premium beauty products are now available in stores this month through Ulta at Target, a long-term partnership Christina Hennington, executive vice president and chief growth officer for Target, described as "a major win for both companies."
"As you know, owned brands are a huge part of our strategic imperative and desire to continue to differentiate in the market, bring great quality products to our guests," Hennington said during the call. "And so, our commitment is to continue to accelerate our owned brands at a faster rate than our base, and that is exactly what we saw in the second quarter."
Neil Saunders, managing director of GlobalData, said in emailed comments that one of Target's challenges is to find ways to continue growing its revenue. Saunders also said that while Target has reaped rewards from the pandemic, the company managed to hold on to much of its gains and secured a higher share of its new and existing customers' spending dollars.
"Target's success isn't complicated to understand. It is underpinned by a very compelling assortment — with a strong range of own brands accompanied by exclusive partnerships with innovative direct-to-consumer labels," Saunders said. "This is supported by a modern store environment which is both engaging and fun to shop, and a very strong omnichannel operation which maximizes convenience for the customer. As much as these are fundamental retail skills, they are ones that too many retailers have forgotten."