Target shares jump as shoppers return to stores, boosting sales

Key Points
  • Earnings of $1.23 a share, adjusted, compared with a forecast profit of $1.19 per share.
  • Revenue was $16.43 billion versus an estimate of $16.30 billion.
  • Same-store sales climbed 1.3 percent, better than the expected 0.7 percent growth.
Target tops Street, Q2 comps up 1.3%
Target tops Street, Q2 comps up 1.3%

Target reported earnings, revenue and same-stores sales on Wednesday that topped analysts' expectations for the second quarter, fueled by a jump in online transactions.

With more shoppers returning to its brick-and-mortar stores and ringing up purchases on, the discount retailer raised its outlook for 2017, as signs appeared that its turnaround efforts are making progress.

Shares of Target were last climbing around 3 percent on the news.

Here's what Target reported compared to what Wall Street was expecting, based on a Thomson Reuters survey of analysts:

  • Earnings of $1.23 a share, adjusted, compared with a forecast profit of $1.19 per share.
  • Revenue was $16.43 billion versus an estimate of $16.30 billion.
  • Same-store sales climbed 1.3 percent, better than the expected 0.7 percent growth.

"We are pleased that second-quarter traffic increased more than 2 percent, reflecting growth in both our store and digital channels," CEO Brian Cornell said in a statement.

"We continue to focus on our long-term strategy. ... While our recent results are encouraging, we will continue to plan prudently as we invest in building our brands, our digital channel, the value we provide our guests and elevating service levels in our stores."

Target's second-quarter revenue increased 1.6 percent from a year ago, to $16.43 billion.

Net income fell to $672 million, or $1.22 per share, in the second quarter, from $680 million, or $1.16 per share, during the same period last year. Excluding one-time charges, the big-box retailer earned $1.23 per share.

Sales from Target stores open more than 12 months rose a better-than-expected 1.3 percent, following a year of declines and amid growing skepticism about the retailer's turnaround efforts.

Meantime, Target's comparable digital sales jumped 32 percent. The retailer has also been making heavy investments online.

"This continues to be a challenging, competitive ... environment [and] that's why we're particularly pleased by the ongoing progress we saw on the second quarter," CMO Mark Tritton told analysts and investors on Wednesday's earnings conference call.

Tritton said Target saw market share gains across all discretionary categories during the period, including apparel and home, though comps in Target's food business remained flat. Sales of produce and adult beverages continue to be bright spots for this segment, he added.

"While we believe Target has much further to go before the grocery business is fully fixed, we applaud the start it has made in turning around this challenging part of the operation," GlobalData Retail Managing Director Neil Saunders wrote in a note to clients.

Though Target reported a slight decline in the average shopper's ticket for the quarter, far more shoppers were seen making "quick trips" or "fill-in trips" this period, the company said.

Looking ahead, Target has updated its outlook for the third quarter, now expecting to earn between 75 cents and 95 cents a share. Analysts were calling for third-quarter earnings per share of 77 cents, according to Thomson Reuters.

For the full year, Target has forecast earning between $4.34 to $4.54 per share. Analysts polled by Thomson Reuters had called for earnings per share of $4.39 in 2017, falling on the lower end of Target's updated range.

From here, a focus on executing new merchandising, and on offering customers value through pricing and convenience, will differentiate Target from the competition, Cowen & Co. analyst Oliver Chen wrote in a note to clients.

Back in its fiscal first quarter, analysts said Target still had a way to go to keep pace with the likes of Wal-Mart and Amazon.

"TGT's results today give us much better confidence that stated strategies are taking hold in better comps and traffic; the next step is consistency," Chen said Wednesday.

Target recently embarked on its plan to invest more than $7 billion in capital in itself over the next three years, in order to "evolve" to meet consumer preferences.

The retailer hopes that by rolling out 12 original brands over the next two years — building on the success of its Cat & Jack children's line — this will drive more shoppers back to stores. Digital initiatives to grow online sales are also top of mind.

This September, Target will launch two new apparel brands — one for men, one for women — and one home goods line. This October, the retailer is set to roll out an updated, women's athleisure nameplate.

"Not only are these brands credible and compelling, but they are also helping to differentiate Target from rivals," GlobalData Retail's Saunders said. "The future introduction of new brands in other areas like adult apparel and homewares should help to drive performance further."

Until this past Monday, Target had so far been on the sidelines as far as deals go, while retail rival Wal-Mart has made acquisitions big and small, ranging from that of to apparel e-retailer Modcloth. But earlier this week Target announced plans to scoop up transportation technology company Grand Junction, with the goal of growing its same-day delivery service.

"The deal should help TGT manage its fleet of transportation assets as it looks to harness the power of its physical and digital assets to improve its store experience and deliver products to customers," UBS analyst Michael Lasser said in a note.

Management on Wednesday said that Target growing its supply-chain capabilities, though the new partnership with Grand Junction, will be key to its success moving forward.

Target has also added two new executives, Mark Kenny and Liz Nordlie, to its food and beverage team. Kenny joins Target from Wal-Mart, and Nordlie from General Mills.

"Importantly, we continue to build food and beverage expertise on our team," CMO Tritton said about the new hires on Wednesday. "We know we [still] need to enhance our assortment of convenience options for guests through... ready-to-eat, ready-to-heat, ready-to-cook and save families time and money."

The company also said it's expanding Target Restock — a next-day delivery service similar to Amazon's Prime Pantry — to more cities, and is testing a "drive up" program that brings purchases right to shoppers' cars. Grand Junction, under Target's umbrella, will play a large role as these initiatives pick up steam.

The recent announcements, particularly as they relate to Target's grocery business, are welcomed by analysts who have been waiting for the big-box retailer to make a move.

"This could be a huge boon for Target," Retail Metrics' president, Ken Perkins, wrote in an email to clients. "This points to building momentum in the business that investors will want to see carry through the fourth quarter of 2018."

Target has also updated analysts and investors regarding its plans to roll out smaller-format stores and remodel its big boxes this year.

Target said it completed remodels on 42 of its existing stores during the second quarter of 2017 and will now remodel more than 300 stores in 2018. The company was originally planning to only upgrade 250 locations by the end of next year.

The retailer will nearly double its number of smaller-format stores this year, with 15 new locations announced for 2018 and "more to come," Target said on Wednesday. CEO Cornell has said these stores contribute more than double the per-foot sales productivity of bigger locations.

"We're excited about the results we're seeing with remodels, but we have hundreds of stores in front of us," CEO Cornell said on Wednesday's conference call, noting that remodeled stores are, so far, seeing about a 2 to 4 percent lift in sales.

"We're seeing a great response to small format, but we will open up dozens of additional stores over the next couple of years. ... We're just getting into the heart of the brand launches, going into the back half of '17 and '18."

As of Tuesday's market close, shares of Target have fallen 28 percent over the past 12 months. The S&P 500 Retail ETF (XRT) meantime has dipped about 16 percent lower over the same period.

TGT 12-month performance

Source: FactSet

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