Target Corp.’s first-quarter sales and earnings easily beat Wall Street estimates Wednesday, but the retailer said it still faces one more technical challenge as it puts its credit-card breach and Canadian misadventure behind it.
Brian Cornell, chairman and chief executive officer, said the April collaboration with Lilly Pulitzer had proved to be a major success, “with most of the collection selling out in the first few days.”
“We were disappointed, however, that our digital channels were not able to properly accommodate the surge in traffic at the time of the launch,” he said, “and the team is working to address root causes and learn from the experience as we prepare for the holiday season peak later this year.”
Target has earmarked $1 billion for investments in technology and supply chain enhancements “to make sure we’re partnering up technology with the ability to provide the product effectively through our supply chain.”
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While Target’s Web site never crashed during the Pulitzer stampede, as it did during its 2011 collaboration with Missoni, the event was both reminiscent of the early crash and an uncomfortable reminder of Target’s struggles in late 2013 with a massive data breach that hurt its holiday performance and contributed to the departure of former ceo Gregg Steinhafel.
But in the first quarter, technology served Target well as digital channel sales rose 37.8 percent and contributed 0.8 points to an overall comparable sales advance of 2.3 percent versus a 0.3 percent decline in the year-ago period.
Digital sales’ share of overall revenues rose to 2.8 percent in the first quarter, or about $480 million, up from 2.1 percent, or about $350 million, a year ago. Cornell estimated that about two-thirds of digital sales growth in the quarter came from increases in apparel and home merchandise.
Overall in the three months ended May 2, the Minneapolis-based discounter posted net income of $635 million, or 98 cents a diluted share, 51.9 percent above the $418 million, or 66 cents, recorded in the year-ago period.
Eliminating special items, EPS hit $1.10, 7 cents above the mean expectation of analysts.
Revenues rose 2.8 percent, to $17.12 billion from $16.66 billion, and gross margin amped up to 30.4 percent of sales from 29.5 percent a year ago.
The consensus estimate for revenues was $17.09 billion, providing Target with dual “beats” on a day when another major retailer, Lowe’s, reported a 4-cent miss.
Comparable sales growth in Target’s designated signature categories, including style, baby, kids and wellness, grew at more than twice the pace of the 2.3 percent corporate average.
Other metrics came up in Target’s favor during the quarter. Transactions rose 2.9 percent and average transaction amount rose 1.4 percent.
Average selling price increased 5.1 percent, although units per transaction declined 3.6 percent.
“This decline in average units was driven by category mix, particularly apparel, along with channel mix as digital transactions typically have fewer units at higher average retail,” said Kathryn Tesija, chief merchandising and supply chain officer, on a morning conference call with analysts.
She also lauded Merona’s performance during the quarter and that of its newest brand, the Ava & Viv plus-size assortment. The Pulitzer initiative in April essentially served as “the icing on the cake,” she commented, despite its relatively small size. Ava & Viv is Target’s privately branded attempt to crack the large-size market in the U.S., estimated at $17.5 billion.
The equity markets liked what they saw in Target’s results, sending shares up 1 percent in early trading. They closed slightly off the mark, rising 0.3 percent to $78.18. The S&P 500 Retailing Industry Group was off 0.6 percent to 1,138.25.
Charlie O’Shea, vice president of Moody’s Investors Service, was impressed by Target’s progress on the digital front. “Target has been lagging its key peers, Wal-Mart and Best Buy, in this critical category for the past few years,” he said. “However, it is clear from recent digital performance that the company’s catch-up efforts are bearing fruit.”
The company said the sale of its former stores in Canada is expected to be completed by the end of next month. Also, it said expenses associated with the credit-card breach totaled $166 million, with $256 million in expense outlay offset by $90 million in insurance receivables.