Forget One-Day Shipping: Target Is All About Same-Day

Target (NYSE: TGT) saw digital sales increase 42% year over year in the first quarter. That's faster than both Walmart (NYSE: WMT) and Amazon (NASDAQ: AMZN). Walmart reported an increase in online sales of 37%, while Amazon's growth in first-party online sales slowed to 10%.

The biggest factor driving growth in digital sales at Target is its same-day fulfillment options. Same-day fulfillment "drove well over half of our digital sales growth in the quarter," CEO Brian Cornell said on the company's first-quarter earnings call. What's more, Target is able to offer same-day fulfillment at a profit.

Here's what you need to know about Target's push to get items into digital shoppers' homes faster.

Any way you want it

Target offers several different same-day fulfillment options for its online shoppers.

The most widely available service is in-store pickup. Shoppers can order an item online while they're at work, for example, and pick it up on the way home. Target has made good progress on making sure items are available across its stores, as part of its efforts to use those stores to fulfill more online orders. Over 80% of online orders are now fulfilled at stores.

Even more convenient for shoppers is the increasing availability of Target's Drive Up service. With Drive Up, customers park in designated spots next to a Target store, and an associate brings out each online order and loads it straight into the car. It's faster and more convenient than going to the in-store pickup location. Drive Up is currently available at 1,250 of Target's 1,851 stores.

The last option for consumers is Shipt, Target's $99-per-year membership service, which offers unlimited same-day shipping from Target stores and about 50 other retailers.

Executives say in-store pickup orders grew 80% year over year, and Drive Up and Shipt grew even faster. They believe the new same-day fulfillment options were incremental to sales instead of replacing in-store sales. That's exemplified by total comparable-sales growth of 4.8%, including 2.7% comparable-sales growth at physical stores.

Driving growth profitably

An important aspect of Target's same-day fulfillment options is that they can be more profitable than shipping items from fulfillment centers or from the back of stores. Chief operating officer John Mulligan said Pick Up, Drive Up, and Shipt are "our most profitable services that we provide to the digital channels. So, as they continue to grow meaningfully faster than the rest of digital, we expect our digital profitability to improve."

Walmart expressed a similar sentiment when it announced its plans for one-day shipping on select items. By requiring customers to order all of their items from a single fulfillment center, the retailer can cut down on shipping expenses by avoiding split orders.

Amazon is taking the opposite approach. It's investing an additional $800 million in its fulfillment network this quarter to push toward one-day shipping on all Prime-eligible items on its marketplace. The move is costly in the near term, but provides for a much greater product selection than the strategy at Walmart or Target -- both companies are largely limited by inventories at stores or local warehouses.

Target's management says digital sales are on pace to increase $1 billion this year, climbing above $6 billion total. That suggests growth will slow sequentially as Target laps more difficult comparable quarters from last year. But if more of its online orders are shifting to more profitable same-day fulfillment options, Target should produce better growth in its margins for digital sales.

Ultimately, investors want to see better bottom-line growth, and same-day fulfillment is driving that for Target.

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