Target scored big in the first quarter and remains confident for the year.
“We are not slowing down,” Brian Cornell, the retailer’s chairman and chief executive officer, said Wednesday. “The team has accomplished an incredible amount,” said Cornell, referring to strategies and capabilities that the company began implementing two years ago.
On Wednesday, Target reported a 10.8 percent lift in first-quarter net earnings to $795 million on a comparable sales gain of 4.8 percent, providing evidence that those long-term initiatives — remodeling stores and evolving them into fulfillment hubs; providing fast and convenient delivery and online order pickup options, and aggressive exclusive and private brand development — are paying off.
“Since that time, we’ve seen a meaningful acceleration in our business,” Cornell said. “In fact, the first quarter marked Target’s eighth consecutive quarter of comparable sales increases.…Throughout this year, we will continue to extend the reach of our same-day fulfillment options, strengthen our portfolio of owned and exclusive brands, remodel and open more stores and invest in our team. We’re confident that we’re well-positioned to deliver strong financial performance in 2019 and beyond.
“We perform best when we are pursuing our own path, not when we are chasing someone else,” Cornell said, citing store openings when others are closing stores, using stores as delivery hubs and maintaining a balanced multicategory assortment.
Target expects low- to midsingle-digit comparable sales growth in the second quarter — a bit slower than the first quarter — and for the year overall. Adjusted earnings per share of $5.75 to $6.05 are expected for the year, compared to EPS of $5.39 in 2018.
The confidence comes despite looming tariffs against Chinese imports and Amazon-sparked price wars. The 25 percent increase in tariffs beginning in June is baked into the guidance.
“We’re concerned about tariffs because they lead to higher prices on everyday products for American families,” Cornell said. “Our team continues to monitor trade negotiations and develop contingency plans to help mitigate the impact of tariffs on our guests and on our business.…It’s important to note that Target’s multicategory portfolio remains a competitive advantage. When there are external impacts to one business area or category, we’re able to balance the impact across our business in ways not available to a single-category retailer. And as you’ve seen in our recent results, the teams been able to manage through last year’s tariffs with minimal impact and we have plans in place to mitigate the impact of additional tariffs scheduled for next month.”
Executives also said the company has kept the operating income up by managing increased costs associated with wage hikes, fulfilling online orders and boosting lower-margin food offerings, as well as the store improvements. Target moves to a $13 per hour minimum wage next month, and $15 by 2020. It’s also increasing payroll in stores to take care of fulfillment, without taking staff off the sales floor.
For the quarter, adjusted EPS came in at $1.53, versus the $1.43 expected by Wall Street, pushing Target’s stock price up almost 9 percent or about $6.40 on Wednesday.
Target’s results were all the more impressive in light of weak first-quarter reports this week and last week from Kohl’s, J.C. Penney, Nordstrom and Macy’s. They have been faced with marking down slow-moving spring merchandise related to unusually cold and rainy weather and a consumer distracted by the divisive political climate as presidential campaigning picks up and tensions grow overseas with Russia, Iran, Venezuela and China.
For some retailers, current spending patterns are bewildering, considering consumer confidence and employment remains high.
Yet for discounters and mass merchants offering sharp value, the start of the year has been good. Walmart and TJX Cos. Inc. reported better results, as did Target.
“If we turn to the overall retail environment, we’re seeing a very consistent and healthy environment across the U.S. I think what we’re seeing right now is the bifurcation of winners and losers,” Cornell said.
Target’s convenience factor was a big theme during the call. Target provides a host of pickup and delivery options, which executives consider critical to creating “a durable” business model for Target.
“We offer in-store pickup in every one of our 1,851 locations, and we walk the order out to the parking lot [for drive up pickup] in more than 1,250 of them,” said John Mulligan, executive vice president and chief operating officer. “There are no fees for either of the same-day options. And guests at more than 1,500 stores across more than 250 markets can order from Target through our Shipt personal shopping service and have their order delivered to their front door, kitchen table, even their refrigerator if they want — in only an hour or two.
Shipt, purchased by the retailer in 2017, offers unlimited free same-day delivery from Target and more than 50 other retailers across the country for a $99 annual fee. There are nearly 100,000 Shipt shoppers delivering orders.
Target sees 300 remodels completed this year and 1,000 by the end of next year. Also, seven small formats opened last quarter, enabling Target to enter neighborhoods within metro areas like New York, Los Angeles, Chicago and Washington, D.C., and certain markets like Santa Barbara, Calif.
Best-selling categories this year so far have included toys and baby products, benefiting from the Toys ‘R’ Us bankruptcy, and sleepwear, swim, adult beverages, kitchen wear, storage and decor. Cornell cited “broad strength across all categories.”