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Improved Sales Trend and Traffic Drove Target’s Top Line in 3Q16

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What drove Target’s top line in 3Q16?

As we discussed previously, mass merchandiser Target (TGT) reported its results for fiscal 3Q16 on November 16, 2016.

The company reported total sales of $16.44 billion. It beat the consensus estimates by $140 million. Its stronger top line was a result of an improvement in traffic and sales trends in the company’s stores.

“We are very pleased with our third quarter financial results, which reflect meaningful improvement in our traffic and sales trends and much stronger-than-expected profitability,” said Brian Cornell, chairman and CEO of Target.

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Why did Target’s sales fall?

Target’s top line fell 6.7% YoY during 3Q16 mainly due to a 0.2% fall in its comparable sales as well as the effect of removing pharmacy and clinic revenues from the company’s results. In December 2015, Target closed the sale of its pharmacies and clinics business to CVS Health (CVS) for $1.9 billion. In the next part, we’ll discuss Target’s margins in 3Q16.

Digital sales stole the show

Target’s digital sales reported strong improvement during the quarter. Comparable digital channel sales rose 26% in 3Q16—compared to last quarter’s 16% growth. Their contribution to overall sales comps stood at 0.7 percentage points—compared to 0.5 percentage points in 2Q16.

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What drove the sales growth?

The company continued to show strong growth and gained market share in Signature Categories. Comparable sales growth outpaced total sales comps by more than three percentage points. The company’s sales also benefited from a strong back-to-school season.

“We also continued to gain market share in key Signature Categories and saw unexpectedly strong sales in the Back-to-School and Back-to-College season” said Cornell.

Competitors’ sales growth expectations

Target’s closest competitor and the world’s largest retailer, Walmart (WMT), is slated to report its results on November 17. The company is expected to report a 1.2% YoY increase in sales to $118.8 billion.

Dollar Tree (DLTR), a discount store chain, is projected to report a 2.7% YoY increase in quarterly sales to $5 billion when it reports results on November 22.

Costco Wholesale (COST) and Dollar General (DG) are expected to report sales increases of 4.2% and 6%, respectively, in their next quarters.

Together, Target, Walmart, Dollar General, and Costco make up 4.9% of the portfolio holdings of the SPDR S&P Retail ETF (XRT). XRT has exposure to about 100 stocks in the retail sector.

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