Brian Cornell of Target

Target Corp.’s shares ticked ahead Wednesday after the retailer bucked the retail industry woes and posted a surprise earnings increase. Net earnings for the first quarter ended April 29, rose 7.7 percent to $681 million, or $1.23 a share, from $632 million, or $1.05 per share a year earlier. Wall Street was expecting Target to echo the dismal first-quarter results reported last week by Macy’s Inc., Dillard’s Inc. Hudson’s Bay Co. and Kohl’s Corp., which all reported sales and earnings misses. 

But it wasn’t all good news for Target. Sales in the first quarter declined 1.1 percent to $16 billion, from $16.2 billion in the 2016 first quarter. Overall traffic fell 1 percent, and comparable sales decreased 1.3 percent, driven by small declines in both traffic and basket size. Comparable digital channel sales increased 22 percent, on top of 23 percent growth in first quarter 2016.

Chairman and chief executive officer Brian Cornell congratulated employees for “strong execution in a choppy environment,” but said, “our results are not where we want them to be and we have much more work to do. The consumer perception hasn’t reflected how low our out-the-door prices really are. We have to establish everyday price credibility.”

To that end, Target late in the first quarter launched a new ad campaign reminding guests that they can save time and money at the retailer, Cornell said.

Cornell reiterated the company’s decision to invest more than $7 billion in technology and supply chain over the next four years. Target’s e-commerce performance accelerated more quickly than the industry,  he said, noting that the retailer invested nearly $500 million in technology in the first quarter and is and on track to invest more than $2 billion this year.

Target launched a 360-degree shopping experience on its web site and is the early stages of transforming its existing store base, with plans to remodel 600 units and open 100 smaller, flexible-format stores, with 30 scheduled to bow this year. “We’re seeing double-digit comp-stores sales increases in the mature flexible-format stores,” Cornell said.

Charles O’Shea, retail analyst at Moody’s, said, Target’s “strong balance sheet, excellent liquidity and flexible financial policy regarding shareholder returns provide the company with sufficient credit support to execute its plan.”

The mixed first-quarter results, including a flattish top line and some margin compression, was offset by robust cash flow generation and solid online sales, O’Shea said. “This reinforces our view that Target’s strategic shift will take time, making potential progress difficult to view through a short-term lens. Given the scope of this transition, year-over-year comparisons will be difficult, but we believe online sales growth and operating cash flow levels will be meaningful data points.”

First-quarter EBITDA, or earnings before interest, taxes, depreciation and amortization, and EBIT margin rates were 10.9 percent and 7.4 percent, respectively, compared with 11.5 percent and 8.2 percent, respectively, in the 2016 period. First-quarter gross margin was 30.5 percent, compared with 30.9 percent in 2016, reflecting increased digital channel fulfillment costs. SG&A expense rate in the first quarter was 19.6 percent in 2017, compared with 19.4 percent in 2016, due to the impact of higher compensation and marketing expenses, partially offset by continued expense discipline across the company.

Target is testing a program called Restock, which allows consumers to choose items from more than 8,000 essentials, which are shipped in a large box. “We expect to have a very competitive subscription service,” Cornell said.

The retailer said in February that it will introduce 12 new apparel and home brands. Cat & Jack and Pillowfort, in-house apparel and home decor and bath and bedding brands for kids, are registering strong growth, Cornell said. Cloud Island, a new nursery decor and bedding and bath brand featuring more than 500 items, is launching later this month. A new swimwear collection, Shade & Shore, launched during the quarter.

“We saw our strongest performance in March and April, benefiting from our Victoria Beckham partnership,” Cornell said. “Given the brand she’s created, we knew our partnership with her would be big, and it was one of the biggest in our history. Not surprisingly, the items sold particularly well online.”

Week-to-week results have been volatile since Christmas and overall traffic declined 1 percent in the first quarter, Cornell said.

“Along with this traffic decline, comp sales in both essentials and food and beverages were down as well,” he said. “As we’ve mentioned in previous calls, we believe that consumers’ perception of value at Target have not reflected how well or out-the-door prices really are. As a result, we’re in the early stages of implementing merchandising and marketing efforts to improve Target’s value perception with guests and reestablish everyday price credibility on key items.”

For the second quarter, Target expects a low-single-digit decline in comparable sales, and earnings per share in the range of 95 cents to $1.15. For the full year, the retailer continues to expect a low-single-digit decline in comparable sales.

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