TGT
#Thanks, <UNK>, and good morning, everyone
As <UNK> mentioned earlier, a key priority of our work and operations is based on the goal to provide new and reliable fulfillment options for our guests
As of today, we have multiple new fulfillment options that are in some phase of testing or rollout across our network
We offer in-store pickup of digital orders, available in all of our store locations
We have a Drive Up service which we just began testing at 50 locations in the Twin Cities
We now have same-day delivery which we're testing at four stores in New York City
We offer next-day delivery through Target Restock, which is now available for 90 million guests in 11 markets
And we have a ship-from-store capability which is now in more than 1,400 of our locations
Of those five fulfillment options, only two were available as we entered the year, in-store pickup and ship-from-store
And while both of those options are relatively mature, we continue to increase the amount of our digital volume handled by our stores
Today, the stores are already fulfilling more than half of our total digital volume through the pickup and ship-from-store capabilities, and that will peak at well above 80% in the days leading up to Christmas
In fact, our stores are planning to ship over 30 million units related to digital orders in the peak four weeks of the holiday season, up from about 18 million units last year
Among the new fulfillment capabilities we've launched this year, Target Restock has been ramping up quickly
During the third quarter, we rolled out this service to an additional 10 markets across the country
We also extended the deadline for next-day delivery to 7 PM and expanded the number of eligible items to more than 15,000. The average value of a Restock order is about 50% larger than an average store transaction and we're pleased that our stores have been able to fill these orders reliably and efficiently
Another capability we've just begun rolling out this year is same-day delivery, which we are now offering at four stores in the New York City market
For a small fee, typically between $5 and $10 depending on the address, guests can leave their basket with us at check out and arrange for delivery later the same day in a time window of their choosing
Guests in these stores are enthusiastically responding to this service
Basket sizes for delivery transactions are running six to nine times the average transaction across the four stores that have the service
And our home category continues to account for more than half of the total sales on these delivery orders
And finally, our new Drive Up capability is in the earliest stage of testing
We rolled out this service to 50 stores in the Twin Cities in the third quarter and we're pleased with the early results
Specifically, guest survey scores for this service are running well ahead of goal, and the stores are outperforming our goal for average wait time
Last week, we began offering this service at our next-generation store in Houston
As we look ahead to next year, we'll continue scaling all of our new fulfillment capabilities, including same-day and next-day delivery
Our ultimate goal is to build a supply chain that can reliably deliver any item in our network to all but the most remote areas in the U.S
in two days or less, with most items delivered in one day
While a large percentage of our digital orders today are already arriving that quickly, we have more work to do before we can reliably deliver in that timeframe across all of our assortment
To achieve this goal and to be able to scale all these new fulfillment capabilities, we need to improve the speed, accuracy, and reliability of our entire supply chain, from end to end
While we have already made progress on all of these measures, we still have a lot more to do and our new flow center in Perth Amboy, New Jersey will help us get there
We added this building to our network, not because we needed the capacity, but because it will allow our team to learn in a separate facility without the distraction of operating in tandem with the rest of our operations
It's managed by a very lean team that operates like a startup, rapidly building solutions from scratch and iterating as they learn
They run their operations with all new systems and processes developed in-house, including their inventory planning system, order management system, warehouse management system and transportation
This facility is now serving five of our new small format stores in New York City, which allows them to test these new systems under the most extreme conditions
Specifically, these stores generate very high sales per square foot and have little to nonexistent backroom storage space
As a result, they require rapid replenishment
In fact, our new Herald Square and Tribeca locations are receiving multiple shipments a day from this facility
When these stores receive merchandise, they don't have the room or the time to unpack and store anything more than they need
To address this constraint, the Perth Amboy facility packs custom shipments for each store which are delivered in bins organized by aisle of the store
As a result, these stores can rapidly move deliveries right on to the sales floors and quickly replenish shelves from the pre-sorted bins
This minimizes the amount of store labor devoted to replenishment allowing the team to devote more of their time to serving their guests
Once the new process reaches a higher level of maturity, we'll be able to scale up within the facility, incorporate automation into the process and begin replicating this model elsewhere in the network
So now, while I hope it's clear that fulfillment and speed are huge areas of focus for the operations team, I want to be clear that's not our only priority
We are also investing to reach guests in new neighborhoods and elevate the experience in all of our stores
To reach new densely populated neighborhoods, we've completely changed our approach to choosing the location for our small format stores
In the past, we had a relatively rigid prototype for a store's size and layout, and our real estate team focused on finding sites that would accommodate that prototype
Today, when we find space available in an attractive neighborhood, we custom design a store that can fit the available space
These stores generate high sales productivity and higher-than-average gross margin rates, driving strong returns on investment
And for the smaller group of these stores that have now been operating for more than a year, we continue to see very healthy growth in both traffic and comparable sales
Beyond new stores, our team is quickly scaling up their ability to remodel existing locations, as we're rapidly growing the program from fewer than 30 stores in 2016 to more than 325 next year
Like our new small stores, we apply a custom approach to our remodel projects based on condition of each store and characteristics of the neighborhood
In all cases, when we remodel a store, we focus on convenience, including the incorporation of self-checkout and a separate area for store pickup
And we upgrade the shopping experience for our guests, incorporating more across merchandising opportunities
We carefully measure the financial performance of our remodeled stores, and we continue to see an average sales acceleration of 2% to 4%, right in line with our goals for the program
But beyond our investments in the physical shopping environment, we're investing in our team and our stores
We're investing in more hours in training to elevate the level of service our teams can provide
We're also changing our operating model, creating specialized teams responsible for specific categories so they can become category experts who can better assist our guests
And finally, we're investing in wages so we can continue to recruit and retain an outstanding team, a team that will continue to differentiate Target from our competitors
The strength of our team was evident as we rolled out four new brands in our stores in the third quarter
Our team presented these new brands better than we ever have before playing a key role in their early success
This has been an amazing year of change for our operations team
We're moving faster and thinking bigger than we ever have before, as we create and implement plans to modernize nearly everything we do
So while I want to stress that our future focus isn't slowing down, I also want to make it clear that everyone across our team is laser focused on serving our guests during the holiday season
I want to thank the team for all their efforts to prepare for the season and for all their upcoming hard work during our busiest time of the year
Our team is the reason Target is a special brand and a great place to work
With that, I'll turn the call over to <UNK> who will provide more detail on our third quarter performance and our holiday plans and merchandising
<UNK>?
Well, I think clearly as we do more fulfillment out of the store, we will add labor to support that
I think we've said since February, we're going to invest in the labor in our stores, invest in training, invest in having experts in the store, invest in having people on the sales floor and changing the operating model for those stores
So that's an important part of what we're doing
Almost separately and independently, we're building teams that – so that we don't take hours away from everything else we're doing that are handling the fulfillment in the backroom
So it's really a question of the operating model in the store that's evolving
And we feel really good about utilizing the stores that are the closest, fastest and cheapest way to get merchandise to our guests
They have significant capabilities now
We're doing same day, next day, two day, pickup, Drive Up, all kinds of ways to meet the guests' needs, and I think that's the important factor, all centered around using the store as the hub
And we think it's a highly efficient way to use our assets and we have great teams that can meet the capabilities that we need for our guests
I'll start with the in-stock question
I think, Bob, we talked about in-stocks last year in February
It's a journey for us
We know, I think we've made a lot of progress in in-stocks given our current capabilities, but we also said in order to really solve the problem, we need to fix some fundamental capabilities in our supply chain around speed, reliability, inventory placement, and that's where we are on the journey
So, the inventory increase at the end of Q3, as <UNK> said, more related to us being sure we're ready for the fourth quarter in categories like electronics, Hearth and Hand, where we took positions, intentional inventory positions, to increase inventories in advance of the fourth quarter, less to do with our management of day-to-day in-stocks/out-of-stocks
We continue to work on those
And as I said, there's the short term working within our current capabilities and then the longer term solve that comes as we continue to improve our overall supply chain capabilities
Your second question, I'm not entirely clear, Bob, on where you're going
Maybe you could clarify how fulfill – your question, the store labor related to fulfillment, I'm not – I didn't quite understand it
I wouldn't compare to third quarter
Compared to last year, we are doing more fulfillment in-store
As we said, we think that's the most cost-effective way given the total P&L, so shipping plus store labor, we think that's the most cost-effective way to do it
Compared to last year, we saw significant spikes last year near the end of the quarter, approaching 80% fulfillment
And I would say, when we get into that 80% range what really goes up is store pickup, and we'll take that model all day long, highly efficient for us, highly profitable from a digital perspective
So, when our mix gets that high in-store, we actually like the economics a lot
I might start with the Drive Up shopper there
I think our guest survey scores there, NPS scores, are frankly off the charts
We see a high utility
It's mom with two kids in the back, it's our core Target shopper who just doesn't – it's raining outside and doesn't want to get out of the car
So we've seen very, very high scores there
The baskets are mixed, as you'd imagine, right? Sometimes they're larger, sometimes it's I need one thing
And the same is very true for pickup in-store, driven by – it can be driven by promotional cadence, it can be driven by convenience
There's lots of different reasons people choose that option, and so the basket varies
There's nothing really to glean from that other than for both of them we see very high NPS scores for our guests which is the most important thing from our perspective
And on your question about profitability, clearly, the closer we are to the store, the better we like it
When a guest comes in and takes it off the shelf, great
Only slightly disadvantage to that would be pickup or Drive Up because there is one more touch, but really again economically a great, great solution for us
As we get into shipping, same-day delivery is more expensive
There's no question about that
And at least today, our guest research leads us to believe guests understand that
They want it priced right, they want the convenience, and they understand there may be a charge to get it to them at the time they wanted during that day
And we've seen that in the four stores in New York, no pushback at all in the delivery charge
And we – the great thing is, we see the baskets, as I said, six to nine times larger, so it ends up being a highly, highly profitable transaction for us
And so there are markets where that will work – that type of transaction will work really well
There are other markets where, as you said, there'll be standard two-day shipping in there
We're working hard to reduce cost throughout that shipping while improving the speed
And so that's on our team so that the guests get the great service and we make that a great economic transaction for Target as well
But we feel good about our ability to make all of it work
