Target easily topped analysts' expectations Wednesday, and simultaneously boosted its outlook for the year. Now the question is, can the discounter keep up the momentum?
After delivering its fourth consecutive same-store sales gain, a third straight quarter of higher traffic and its fourth earnings beat in as many quarters, the bull's-eye retailer is about to face its toughest comparisons since new CEO Brian Cornell took the helm.
Though Target impressed with 2.4 percent same-store sales growth in the fiscal second quarter, it was up against flat performance from the prior year. Similarly, its gains in the prior two quarters came atop declines in the corresponding year-earlier periods.
Now, as Target enters the second half of the year, it will be up against two quarters of positive comparisons, including a nearly 4 percent gain during the fourth quarter.
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"They're moving in the right direction… but they still have more work to do," said Ken Perkins, president of Retail Metrics.
Cornell, who just last week marked his one-year anniversary at the big-box retailer, told investors that while the Minneapolis-based company is "pleased" with its traction, "we have much more to accomplish."
This includes overhauling its food business, by upgrading presentation and incorporating healthier options; providing a more localized assortment to its various locations; and improving its digital operations, by speeding up the delivery of online orders, and offering product recommendations that are better tailored to individual shoppers.
Additionally, through outgoing CFO John Mulligan's new role as chief operating officer, the retailer will work to fine-tune its supply chain and do a better job of keeping items in stock.
Cornell said that as Target has stretched its current supply chain beyond its core capabilities, including adding the ability to ship from store, the out-of-stock situations on its shelves have become "unacceptable" over the past year.
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Despite these challenges, analysts were encouraged by the strides Target has made thus far. For one, it's getting customers back in its stores, with about two-thirds of its same-store sales gain being attributed to traffic.
For another, growth in its "signature" categories—which include style, kids and wellness—is growing at three times the rate of the company average. Toys, in particular, saw a big boost during the quarter, posting a 12 percent increase.
Mulligan noted that the company's overall sales performance is impressive, given the deep promotions the retailer held in the year-ago period. This likewise helped drive Target's margins higher, a trend Mulligan expects to continue.
"It is particularly encouraging to see that sales growth has not been driven by excessive discounting or promotions," said Stephen Ward, commercial director of the Conlumino retail research firm.
"In our view much of this is down to a strategy that has seen Target shift away from chasing consumers only interested in low prices, to ones that are more concerned with good value."
Although investors were disappointed in the retailer's same-store sales forecast for the third quarter—its shares turned negative after Mulligan told investors that it expects this metric to rise between 1 and 2 percent in the current quarter—management emphasized that back-to-school and back-to-college shopping are off to a "very positive" start. This sales period should be aided by a shift in marketing dollars to the third quarter.
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While sales gains at both Target and Wal-Mart hint at a healthier low-income consumer, Perkins said he remains concerned about whether spending from this group of shoppers is sustainable. He added, however, that this should be less of an issue for Target, whose shoppers tend to have more wiggle room in their budgets.
"The issue all along has been the types of jobs that this economy is creating don't pay very much," he said.
"It'll be interesting to see if [Target] can continue to take share from other discounters."
Target's stock was slightly lower, near $80, Wednesday afternoon.