Target beats expectations in Q1, but caution continues

CEO cites improving sales momentum but comps, traffic down

Target Corp. on Wednesday reported sales and earnings results that were better than the company or Wall Street expected, as momentum improved over the course of the quarter and was supported by strong execution in stores.

In a conference call discussing results, CEO Brian Cornell was quick to add however, “we're not doing any high-fives in the room here today,” and maintained modest expectations for the current quarter as Target maintains sights on a long-term turnaround.

The Minneapolis-based mass merchant noted that comparable sales declined by 1.3% -- a smaller decline than expected -- and that overall sales fell 1.1% to $16.1 billion in the period, which ended April 29. Net earnings of $681 million improved by 7%, and earnings per share of $1.23 were well above consensus estimates of 91 cents per share.

“While we are pleased that our first quarter financial performance was better than expectations, our results are not where we want them to be and we have much more work to do,” Cornell cautioned. “Week to week results have been volatile since Christmas and overall traffic declined nearly 1% in the first quarter. Along with this traffic decline, sales in both essentials and food and beverage were down as well.”

Target is in the beginning stages of a turnaround, but said in the meantime it would chase business opportunities where it saw them.

“That's exactly what happened in the first quarter,” Cornell said. “Following very soft trends in late January and into February, we saw an acceleration beginning in late February, which was followed by better than expected sales in March and April. While our comps sales were strongest in April, if we adjust for the Easter shift, we saw our best results in March.”

Target also saw digital sales improved by 22% in the quarter, which Cornell said was better than industry averages.

Cornell reiterated intentions to improve food sales as a part of Target’s turnaround, saying the company invested in hiring grocery experts in the quarter, including former Kroger food executive Jeff Burt, who is now leading the company’s food and beverage team.

Bright spots in the quarter included a small increase in comps of produce during the quarter “reflecting the work we've done to gain credibility in this key part of the assortment,” Cornell said. Target also saw a mid-single-digit increase in adult beverage comps. “We plan to expand space for adult beverages in more than 100 additional stores in the second quarter with more planned for the third quarter and beyond,” Cornell said.

The company’s traffic woes are related to some degree in a gap between Target’s pricing and customers’ perceptions of them, Cornell said. “That's an issue for us because we know that's a bigger message that we need to convey. So we're continuing to sharpen our price and our value messaging at the same time and make sure that we move to a more regional-based pricing, localized pricing, so it's more relevant to the guests in a competitive set, which is not what we were doing during 2016 and we're rapidly iterated on in 2017. So you see more of that activity and more of that benefit as we move through 2017.”

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