Brief

Target handily beats Q1 estimates as new strategy gains traction

Dive Brief:

  • Target on Wednesday blew past first quarter Wall Street expectations and its own guidance despite sales declines, sending shares up almost 6%.

  • Q1 sales fell 1.1% to $16.0 billion from $16.2 billion last year, including a same-store sales decline of 1.3%, (which reflected a 0.8% decrease in transactions and a 0.6% decrease in average price per transaction that were partially offset by the contribution from new stores), according to a company press release. That beat a forecast from Thomson Reuters cited by MarketWatch for sales of $15.62 billion. 

  • Comparable digital channel sales rose 22% percent, contributing 0.8 percentage points of same-store sales growth and growing to 4.3% of total revenue, up from 3.5% in the year-ago period. On an adjusted basis, earnings fell to $1.21 per share from $1.29 per share a year ago, handily beating the Thomson Reuters forecast for 91 cents per share cited by MarketWatch.

Dive Insight:

In his statement Wednesday, Target CEO Brian Cornell, who previously described a “seismic shift” in retail, noted that the retailer, in the midst of a major effort to address that, has already begun to see results from its new strategy “in a very choppy environment.”

“After starting the quarter with very soft trends, we saw improvement later in the quarter, particularly in March,” he said. “We are in the early stage of a multi-year effort to position Target for profitable, consistent long-term growth, and while we are confident in our plans, we are facing multiple headwinds in the current landscape. As a result, we will continue to plan our business prudently while preparing our team to chase business when we have an opportunity.”

In March, the big-box retailer unveiled a series of initiatives designed to reverse its same-store sales declines, including an investment of more than $2 billion of capital in 2017 and more than $7 billion over the next three years. The company has said it will use some $1 billion of operating profits this year alone to improve brick-and-mortar and digital operations. 

Analysts Wednesday said the results, though they beat low expectations, do indicate that the company’s new strategy will take time to truly yield meaningful improvement. Moody’s Investors Service Lead Retail Analyst Charlie O’Shea called the first-quarter results “mixed” and in line with Moody’s analyst expectations. He noted that the company’s “strong balance sheet, excellent liquidity and flexible financial policy regarding shareholder returns provide the company with sufficient credit support to execute its plan.”

“Target’s Q1 performance … reinforces our view that its strategic shift will take time, and therefore potential progress is difficult to view through a short-term lens,” O’Shea said in a note emailed to Retail Dive. “Given the scope of this transition, year-over-year comparisons will be difficult, though we believe online sales growth and operating cash flow levels will be meaningful data points.”   

Target was also helped by its poor performance in previous quarters, and its earnings lift was primarily a function of reduced interest expense, which fell by 65.3% over the prior year, according to GlobalData Retail Managing Director Neil Saunders. Taking those elements into consideration, the “fault lines in Target's business model become more apparent,” he said in a note emailed to Retail Dive.

“The foremost issue is the quality of Target's stores,” he warned. “These are far too functional, change too infrequently and offer very little in the way of inspiration. Such a position means that Target struggles to pull in customers, something our data shows is getting worse over time, especially among younger millennial consumers.”

Setting aside grocery, though, Target is doing a good job with its merchandise assortment, according to Saunders, but even then its stores work against it, in part by reducing sales by more careful e-commerce shoppers, including impulse buys. And it undermines its own merchandising excellence, as demonstrated by releases like its Victoria Beckham collection, with lackluster presentation — which Saunders characterized as “the age-old tale of Target not showcasing its wares with enough pizzazz.” The answer is to address those issues in smaller ways and not just via the major brick-and-mortar revamp now underway, he added.

“Target's selection is, both in our view and when rated by consumers, compelling, of reasonable quality and excellent value for money,” he said. “The high proportion of own-brand across areas like home also helps to differentiate the company from retail rivals. The issue is that more and more consumers are discovering and buying this range online rather than in stores, something that is exacerbated by poor availability and frequent out-of-stocks in shops.”

Saunders also warned that continuing price competition could hurt Target’s bottom line, especially in grocery, but that the company’s planned improvements to stores and to its business more generally “should help to take the edge off.”

“While Target has been criticized for pulling back on some of its more futuristic initiatives, we believe that it is right to channel investment into getting the basics right,” he said. “At this time, Target needs to fix its shaky foundation, not build ivory towers on top of it.”

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