Target Corp. chairman and chief executive officer Brian Cornell said the retailer’s second-quarter results validate its costly and far-ranging initiatives, which include transforming the supply chain, investing in the store experience and associate training and launching 12 new apparel and home brands.
The discounter’s net income slipped 1.2 percent to $672 million from $680 million a year earlier. But share buybacks boosted earnings per share to $1.22, from $1.07, beating analyst estimates of $1.19. The increase was driven by traffic growth of 2.1 percent.
Sales in the quarter ended July 29 rose 1.6 percent to $16.4 billion from $16.2 billion on a 1.3 percent comparable-store sales gain. In the digital channel, comps rose 32 percent on top of 16 percent growth in the second quarter of 2016.
“We’re very pleased with our second-quarter performance,” Cornell said. “It gives us confidence.”
Investors were also reassured and pushed shares of Target up 3.6 percent to $56.31 on Wall Street.
Cornell noted that the 12 new brands will replace $10 billion worth of business related to labels such as Merona and Mossimo, which Target is exiting. Cornell cited Cat & Jack as an example of the initiative’s potential. The kids label, which was expected to be a $1 billion brand, hit the $2 billion mark in just over a year since its launch.
Cloud Island, an infant brand that bowed at the end of May, is generating double-digit comp increases, Cornell said, adding that July’s launch of Isabel Maternity by Ingrid & Isabel, is looking strong out of the gate. Launching in September are A New Day, a collection with a feminine bent and lots of prints and patterns; Goodfellows & Co., classic looks and core items for men, and Project 62, featuring modern home styles. JoyLab, based on emerging street styles, will bow in October.
“During a period of rapid transformation in retail, when many are shrinking, we’re committed to continued progress against our long-term goals,” Cornell said. “The pace of change doesn’t show any signs of slowing down. We’re able to [innovate]. It starts with the underlying health of our business with a profit of nearly $700 million in the second quarter.”
In line with its efforts to use technology to move into the future, Target this week acquired Grand Junction, a transportation technology company, with same-day delivery in the test phase at the flexible-format store in Manhattan’s TriBeCa. “The basket size for same-day delivery is six times the average,” Cornell said. “We plan to expand same-day delivery to other New York stores.”
Target is also testing curbside pickup and expanding the number of ship-from-store and pick-up-in-store locations, but competitor Wal-Mart is far ahead in these areas. The retailer is expanding its Restock service that offers next day replenishment of household items for a flat fee of $4.99. Following a Minneapolis pilot, Restock will be available in Dallas-Ft. Worth and Denver.
Back-to-school and back-to-college comps and market share has grown for 10 years straight, Cornell said, adding, “We’re partnering with Barnes & Noble College’s 700 campus stores and five million students with specialized assortments.”
Target is also investing in its brick-and-mortar stores. The retailer plans to open 100 flexible-format doors, including 30 this year, and plans to remodel 600 units.
Cornell said, “In particular, we are pleased that second-quarter traffic increased more than 2 percent, reflecting growth in both our store and digital channels. We continue to focus on our long-term strategy, as we work to transform every part of our business and build an even better Target that will thrive in this new era in retail.”
Target is investing more than $7 billion in technology and supply chain over four years. The company invested nearly $500 million in technology in the first quarter. The retailer’s e-commerce performance has accelerated more quickly than the industry and Target plans to invest more in 2018.
Capital expenditures for 2017 are expected to range from $2 billion to $2.5 billion, and for 2018, $3 billion or more. “We’ll increase our investment where we’ve seen long-term returns,” Cornell said.
Facing a tougher prior-year comparison, third-quarter comps are expected to be flat, with full-year comps projected to range from flat to down 1 percent. EPS in the third quarter are projected to be 75 cents to 85 cents. Full-year guidance was raised to $4.35 to $4.55, an increase over previous guidance of $3.80 to $4.20.
Gordon Haskett analyst Charles Grom, raised Target’s rating from sell to hold, saying, “With top-line trends inflecting and coming in better-than-plan, led by digital, which was up 32 percent in the second quarter, and traffic, ahead 2.1 percent, Target has been able to cushion the blow of its initial investments.”