Strength in apparel and home-related categories in the second quarter pushed sales and earnings up at Target Corp., which caused the retailer to revise its full-year profit outlook.
Carving out costs related to its discontinued Canadian business, net income jumped to $753 million, or $1.21 per share, from $234 million, or 62 cents, in the same period last year on a sales gain of 2.8 percent to $17.42 billion from $16.96 billion.
As a result, the retailer now expects adjusted earning per share to be between $4.60 and $4.75, which compares to its prior guidance of $4.50 and $4.65.
Brian Cornell, chairman and chief executive officer, said in the earnings report that results reflect higher traffic and strong sales of its “signature categories,” which includes apparel, wellness and home goods. “While the momentum in our financial results is encouraging, we have much more to accomplish,” he added. “Looking ahead, we are focused on making further progress against our strategic priorities and are committed to improving operations as we move through the important back-to-school, back-to-college and holiday seasons.”
That committment to improving operations was evidenced earlier this week when the retailer named former chief financial officer John Mulligan to a newly created position of chief operating officer.
For the second quarter, same-store sales grew 2.4 percent. “Comparable sales in signature categories (Style, Baby, Kids and Wellness) grew three times faster than the company average, resulting in comparable sales growth of four to five percent in both Home and Apparel,” the retailer said in the report adding that online sales gained 30 percent, which bolster same-store sales growth by 0.6 percentage points.
Regarding its real estate sales during the quarter in Canada, the retailer said that “after-tax losses from discontinued operations were $20 million in second quarter 2015, compared with $157 million last year.”
The strong performance in apparel is noteworthy and reflects other retailers reporting a shift back to spending of the segment – especially women’s wear and dresses.
Shares of the company were trading down 0.8 percent to $79.65 in the midday session on heavy volume and as broader market indices were also down. Investors didn’t like the retailer’s conservative sales outlook for the current quarter. But at the closing bell, the stock reversed course and finished up 0.7 percent to $80.87. Oliver Chen, retail analyst at Cohen and Company has a $90 price target on Target, and an “outperform” rating. “We expect shares to trade higher based on the slightly better comps and [earnings per share] beat, especially given unwarranted stock pullback since mid-July,” Chen said in a research note.
On a conference call with investors, Cornell went into detail about the company’s merchandising efforts including a push over the past six months to “define clear roles for each of our merchandise categories, and devoting resources that are growing what we call our ‘signature categories.’” For apparel that includes the company’s “Style” business, which includes most of apparel, home goods and beauty as well as baby wear, kid’s clothes and wellness products.
“While we’re still in the early days of this work, we’re already seeing a compelling benefit from our efforts,” the ceo said. “Specifically, comp sales in signature categories grew more than 7 percent in the second quarter – three times our overall comp growth. In apparel, results were strongest in baby and kids, along with women’s ready to wear.”
Toys were also strong during the quarter, Cornell said adding that online sales also mirrored what was occurring in stores.
“Outside our stores, our focus on style was evident as more than 80 percent of our second quarter digital channel sales growth was driven by home and apparel,” Cornell explained. “In home, where digital penetration is much higher than average, digital channel growth drove half of our total comp this quarter.”
And as the retailer doubles down on its e-commerce business, Cornell said digital orders are being shipped from 140 stores. He expects that to rise to 450 stores by the end of the fiscal year. “Ship from store capabilities allows us to balance inventory across the network, leverage the capital and labor already in our stores and reach guests more quickly,” he said.
In the food business, Cornell said the company conducted a “small test” in the Chicago market. It’s aimed at the national “buy local” movement. Cornell said the test was designed to “inform our localization efforts.” The test includes tweaking assortments and presentation of products as well as reconfiguring inventories on key items. The ceo said test stores showed a 2-percentage point gain in the category versus control stores.
On the media front, Cornell said the company has a 21-page insert in the September issue of Vogue, “where we’ve reimagined some of the most iconic covers by incorporating products we sell.” He said readers can “digitally shop” the pages, “so our guests can go behind the scenes to buy what they see and access additional content.”