“There is no doubt that like others, we’re currently benefiting from a very strong consumer environment, perhaps the strongest I’ve seen in my career,” said Brian Cornell, chairman and chief executive officer of Target Corp.
That statement came during a conference call with analysts Wednesday morning after his company posted an unprecedented increase in second-quarter foot traffic of 6.4 percent — the best it’s seen since it started reporting the metric in 2008 — along with the biggest total comparable-store sales increase in the last 13 years of 6.5 percent. Foot traffic and comps, along with second-quarter profit and revenue all topped analysts’ expectations. Digital sales shot ahead more than 40 percent in the quarter ended Aug. 4. Building on that momentum, Target raised its earnings outlook for the full year.
Evidence of the booming economy was seen earlier this month, as Walmart Inc. rode the wave of consumer spending to a comp-store sales increase of 4.5 percent, blowing past Wall Street’s consensus estimate of 2.5 percent, and its best showing in more than a decade.
Cornell stressed that the economy isn’t the only lever fueling Target’s growth. “Market share data demonstrates that our current results are benefiting from more than just the environment, as we’re seeing broad market-share gains across categories we sell,” he said. “The question we continue to hear from many of you is whether we can separately measure the benefit of each of these investments we’re making. And the honest answer is we can’t evaluate each one of them in isolation. Instead, it’s the collective benefit of all of these initiatives that is keeping Target more top-of-mind with guests and enticing them to visit our stores and our site more often.”
Both Walmart and Target are in the midst of multibillion-dollar, multiyear-investments in areas such as technology, stores, price and people. The Bentonville, Ark.-based retail giant has been spending heavily to add digital savvy to its brick-and-mortar bulk. Target is remodeling stores, spending on new digital capabilities, investing in price, and hours, raises and training for employees.
Cornell said the industry is becoming bifurcated into retailers that can fund initiatives and those that can’t, the haves and have-nots. “I think what you’re seeing right now from a macro basis, is well-run retailers with strong balance sheets that generate cash that they can reinvest in their business are winning right now,” he said. “Obviously, others right now can’t afford to invest in their store experience or build capabilities or drive differentiation. And they’re giving us share. Clearly there are winners and losers. We certainly think we’re migrating to the winners’ side.
“We’re continuing to perform wall-to-wall remodels of 1,000 stores over three years, transforming the supply chain to deliver convenient fulfillment options, opening smaller-format stores, investing in price, delivering a constant drumbeat of new and exclusive merchandise, introducing new and convenient digital capabilities, and most important, making investments in hours, raises and training.”
In the age of Amazon, Target and Walmart are proof positive that brick-and-mortar retailers, particularly those with strong digital capabilities, can not only survive, but thrive. Investors have taken the strength as a sign that retailers can still be relevant and have the ability to drive foot traffic to stores. After spiking Wednesday morning with the earnings release, Target shares closed up 3.2 percent to $85.94.
Earnings per share increased 23 percent to $1.50 in the second quarter, from $1.22 in last year’s period on sales of $17.55 billion, a 7 percent gain from $16.4 billion in the 2017 period. Net income rose 19.1 percent to $799 million from $671 million in last year’s second quarter.
Target in the last 18 months launched 12 new brands for men, women and home, including Goodfellow & Co., A New Day and Hearth & Hand With Magnolia, respectively. In the second quarter, the retailer introduced three brands for Gen Z and Millennials: Wild Fable, fashion for teens and young women; Original Use, streetwear-inspired clothing for young men, and Heyday, its first-owned electronics brand.
Consumers are also responding to Shipt, an online same-day delivery platform the retailer in 2017 acquired for $550 million. Cornell said in markets such as New York, Chicago, San Francisco, Boston and Washington, D.C., the ability to shop at a small-format store and “hours later have someone deliver that package to your doorstep for a $7 charge has been very well-received.”
Mark Tritton, executive vice president and chief merchandising officer, said early results for the back-to-school and back-to-college businesses are encouraging. Apparel sales grew in the high teens. The baby and toy categories present “a unique opportunity to gain market share given the recent closures of Toys ‘R’ Us and Babies ‘R’ Us across the country,” Tritton said. “Given the strong affinity between families and young children and our brand, we expect to see traffic and share gains in both babies and toys for the rest of the year and beyond.
“We’re taking market share in all of our merchandising categories,” Cornell said. “There are going to be billions of dollars of market share up for grabs and we’re going to position ourselves to take more than our share. This gives us confidence that we’ll be able to lap these numbers in 2019 and beyond.”
Based on the momentum, the retailer expects comp-store sales in the third quarter and second half of 4.8 percent, in line with the first half of 2018 and third-quarter EPS in the range of $1 to $1.20, compared with 87 cents in the third quarter of 2017. For the full year, Target raised its outlook on EPS to $5.30 to $5.50, compared with the prior range of $5.15 to $5.45.
Gross margin rate was 30.3 percent in the second quarter compared to 30.4 percent in the 2017 quarter. The selling, general and administrative expenses rate in the 2018 second quarter of 21.7 percent compared to 21.6 percent in the earlier period. Earnings before interest, taxes, depreciation and amortization rose 2.8 percent to $1.74 billion from $1.69 billion.
Cornell discussed the impact of a worsening tariffs situation, saying, “We’re aware that situation can further escalate with tariffs. We’re concerned. A prolonged deterioration could damage economic growth. Our concern is centered on the impact on tariffs, consumers and the economy and we’ve been making our position known. We’re developing and implementing contingency plans.”