Customers walk with their purchases from a Target store, in Methuen, Mass. Target Corp. reports earnings, Wednesday, Aug. 16, 2017Earns Target, Methuen, USA - 27 Jun 2016

For Target Corp., investing back in the business is paying off.

That was the main message from executives of the $72 billion Target chain on Wednesday morning after the retailer reported that robust traffic in stores and online fueled a 5.9 percent increase in net earnings in the first quarter to $718 million from $678 million in the year-ago period.

Sales rose 3.5 percent in the quarter ended May 5 to $16.56 billion from $15.99 billion in the year-ago period.

Comparable sales grew 3 percent. Digital sales rose 28 percent. First-quarter traffic rose 3.7 percent, the most in 10 years, executives said.

They also said the business is gaining momentum in the second quarter and as a result, Target expects an acceleration in its comparable sales into the low- to midsingle-digit range in the quarter.

However, margins did slip, and Wall Street reacted, pulling the stock price down 5.7 percent, or $4.30, to $71.17 by the end of trading. Target’s first-quarter adjusted earnings per share of $1.32 fell short of analysts’ estimates of $1.39. The first-quarter operating margin was 6.2 percent, compared with 7.1 percent in 2017, and gross margin was at 29.8 percent, versus 30 percent in 2017. Digital fulfillment costs, store remodels, higher wages, the mix of sales and pricing changes impacted the margins, though cost-saving efforts offset some of that. Overall, Target is spending in several areas to become more competitive against such rivals as Amazon Inc. and Walmart Inc.

Target’s first-quarter comp-sale results were lower than Macy’s Inc., which reported a 4.2 percent lift, but were much better than those of Nordstrom Inc., at 0.6 percent, and J.C. Penney Co. Inc. at 0.2 percent. As reported, Penney’s chairman and chief executive officer Marvin Ellison is leaving the department store to join Lowe’s as ceo next month.

At Target, cooler weather in early April delayed spending on some higher-margin seasonal purchases, executives said. Target expects margins to improve through the year as investments lessen and cost-cutting continues.

Store remodels, the rollout of small neighborhood store formats, the launch of private or exclusive brands under such labels as Universal Thread, Opal House and Hunter, and a menu of new faster delivery and pickup options, including a “drive-up” service at more than 250 stores, and renewed focus on key areas including beauty, apparel, home and food and beverage, are among the areas of investment. Recently rolled out nationally was the “Target Restock” program providing next-day delivery service for household essentials.

Since the start of the fiscal year, Target completed 56 remodels, which led to incremental 2 to 4 percent sales lifts in the remodeled unit. This quarter, 100 remodels are in progress and set for completion in the second quarter.

Last quarter, Target opened seven stores, launched three brands and introduced a limited-time collaboration with Hunter, though there has been a delay in the delivery of Hunter tall women’s rain boots.

Target is also investing in the back-end operations, adding new technology to optimize inventory allocation and replenish faster and more accurately. This year’s capex budget is about $3.5 billion.

Stores now fulfill two-thirds of online orders compared to 50 percent last year, and 1,400 stores now ship directly to customers’ homes. The drive-up service will be in about 550 stores in the second quarter, and same-day delivery is being rolled out to more than 40 states and the majority of Target stores by the holiday season.

To motivate workers, in the first quarter Target increased its national starting wage to $12 or more, with a goal of reaching a $15 national minimum by the end of 2020.

During a conference call, chairman and ceo Brian Cornell said the performance of the business in the first quarter “demonstrates the resilience of our multi category portfolio. Our traffic growth of 3.7 percent is the strongest we’ve seen in more than 10 years, reflecting healthy increases in both our stores and digital channels.

“Comparable sales growth of 3 percent was consistent with our guidance driven by strength in home, household essentials and food and beverage. This demonstrates the benefits of maintaining a balanced portfolio as strength of these categories offset the impact of a late spring on our temperature-sensitive categories, which have accelerated dramatically as we entered the second quarter.

“We also benefited this quarter from the launch of three new own or exclusive brands in home and apparel and a successful limited-time partnership with Hunter. In our digital channels we continue to see strong trends even as we compare over rapid growth in past years.

“Everything is contributing to our success and our guests are responding.”

“When we look at what’s driving our traffic growth, we can’t isolate a single driver. It’s the combination of all the changes we’ve been making that have changed the trajectory,” said John Mulligan, Target’s chief operating officer, during the conference call. “In fact, we continue to see the benefit of our 2015 sale of the pharmacy business to CVS as (prescription) counts in our store pharmacies increased 8 percent in the first quarter.”

In another positive sign, Target said this year, regular-priced sales increased more than $1 billion compared with last year, due to the impact of the company’s “priced right” everyday strategy.

Home, essentials and beauty had a strong quarter, growing well over the company average. Beauty has been benefiting by Target’s focus on naturals, and diversity in hair products and body care. Both apparel and hard lines comped positive, but below the company average. In apparel, strength in new brands and improvements in the men’s offering offset some softness from cool temperatures in the early part of spring.

However, officials said Target is seeing sales momentum this month, benefited by warm weather categories.

“Target’s Q1 results reflect the favorable impact on sales, both in stores and online, of the company’s exclusive brand initiatives, which continue to resonate with shoppers,” stated Moody’s lead retail analyst Charlie O’Shea.

“Slight margin compression is understandable due to the various sensible strategic investment initiatives that are in process, from employees to e-commerce, as well as the impact of the competitive dynamic rippling throughout retail led by Walmart and Amazon as they continue to battle for market share using price,” continued O’Shea.

“Working capital continues its favorable trend, liquidity remains robust, and Target is setting itself up for solid performance in the looming back-to-school season, which will serve as a further ‘litmus test’ for its investments.”

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