Three reasons for Target’s better-than-expected earnings

Three reasons for Target’s better-than-expected earnings

Three reasons for Target’s better-than-expected earnings

Target Corp.’s better-than-expected second-quarter results can be attributed to three key factors: a focus on convenience, with stores at the center of that effort; capitalizing on the hole left by the liquidation of Toys ‘R’ Us and Babies ‘R’ Us stores; and the strong consumer.

Target TGT, +4.72% shares are up 5% in Wednesday trading after the retailer reported a 7% revenue increase, to $17.55 billion for the quarter; traffic growth of 6.4%, the strongest since it began reporting the metric in 2008; and same-store sales growth of 6.5%, the fastest growth in 13 years.

Target Chief Executive Brian Cornell said the company plans to remodel more than 1,100 stores by 2020, with Chief Operating Officer John Mulligan adding that well over 300 remodels are planned for the year.

“The elevated experience at both newer and refurbished shops is driving both customer traffic and conversions, which is one of the reasons why shops contributed 4.9 percentage-points to comparable sales growth,” said Neil Saunders, managing director of GlobalData Retail. “In essence, Target has given people reasons to come and visit and is encouraging them to spend when they do.”

Read: Walmart same-store sales grow at fastest pace in 10 years as e-commerce spending climbs

Target has also added small-format stores in more areas around the country, which has given the company access to new markets and new guests, Cornell said on the Wednesday morning media call.

Not only are the stores located closer to shoppers, they’re providing services, like same-day delivery and a Drive Up service that brings purchases to shoppers’ cars, that provide the ease that today’s multi-platform shoppers are looking for.

“We’re shipping from more than 1,400 stores, using them as fulfillment centers,” Cornell said on the call.

Analysts support the varied use of stores, which were once seen as detrimental in an increasingly e-commerce world. Target also reported 41% digital sales growth.

“Target is leveraging its terrestrial store assets and building a model that is reoriented for the new, ecommerce-enabled consumer,” wrote Quo Vadis President John Zolidis in a note. “The principals are to offer value and/ or exclusive product and combine it will convenience for the customer via technology.”

See: U.S. retail sales show midsummer muscle

Target is also making the most of the gap left in the market by the exit of big players in the baby and toy categories.

“We’re building momentum in babies and toys, picking up from Toys ‘R’ Us and Babies ‘R’ Us,” Cornell said on the media call, saying there’s both opportunity and demand with families, a core group for the company.

Target’s private labels, like Pillowfort, the company’s home collection for kids, and Cat & Jack, the kids apparel brand, are providing a tailwind as well. Overall, GlobalData’s Saunders thinks Target’s private brands are a well-managed asset.

“In stores, Target has supported the lines with smart promotional materials and has avoided the old trap of merchandising everything in the same way and on the same fixtures,” he wrote. “The result is a very compelling and unique group of brands each with a distinct appeal and handwriting.”

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And Target, like its competitor Walmart Inc. WMT, -0.14% and other retailers, is getting a bump from the strong consumer position.

“There’s no doubt, that like others, we’re currently benefiting from a very strong consumer environment, perhaps the strongest I’ve seen in my career,” Cornell said on the investor call, according to the FactSet transcript.

Credit Suisse analysts led by Seth Sigman think Target is making the most of the current shopper landscape.

“Overall, results show that Target is clearly capitalizing on a stronger consumer backdrop, seasonal drivers, and market share opportunities,” Credit Suisse wrote. “Results include accelerating store and online sales, and likely reflect progress across numerous strategic initiatives, from merchandising and brand launches, to expanded fulfillment options, and remodels.”

Credit Suisse rates Target shares outperform with an $86 price target.

Target also raised its 2018 guidance, in line with what the company has seen at the beginning of the year.

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“Reflecting the company’s myriad investments, margins reflect slight, almost de minimus compression, which is the short-term pain for long-term gain, and we note that working capital continues to improve, with accounts payable exceeding inventory, indicating improved leverage with vendors,” said Moody’s Lead Retail Analyst Charlie O’Shea.

“The raising of guidance for the back half of the year is consistent with our view that there are macroeconomic tailwinds that can be exploited by the strongest, most financially flexible retailers that are hitting on all cylinders, with Target definitely in that class.”

Target stock has rallied nearly 34% for the year to date, outpacing the S&P 500 index SPX, +0.02% , which has gained 7.2% for the period.

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Tonya Garcia

Tonya Garcia is a MarketWatch reporter covering retail and consumer-oriented companies. You can follow her on Twitter @tgarcianyc. She is based in New York.

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