Target Rides Strong Traffic To Solid Q1

Target (NYSE: TGT) announced solid first quarter earnings on May 23, but its stock still fell as the retailer’s aggressive push to keep up with Amazon and Walmart, both online and in grocery, led to shrinking margins. Target has been looking to overhaul its business model with the expansion of small-format stores, in addition to revamping its existing stores and improving supply chain management, since the beginning of 2017. The results of its business transformation have started to show in the company’s financials from this quarter. Below we discuss some key takeaways from Target’s earnings, as well as our Q2 and fiscal 2018 outlook using our interactive platform.

In Q1, Target’s revenue increased 3% year-over-year (y-o-y) to $16.8 billion, primarily due to a 3.0% increase in comparable sales, which was ahead of consensus estimates. The company’s digital comparable sales grew 1.1% y-o-y, while store comparable sales grew a robust 1.9% y-o-y. The fact that the company has been able to grow its store comparable sales, despite significant competitive pressure, suggests that its initiatives are resonating well with customers. However, Target’s gross margin was 29.8%, down 20 basis points, largely due to increased fulfillment costs resulting from growth in digital sales. On the cost side, selling and general administrative (SG&A) expenses grew 6% y-o-y, due to an increase in compensation expenses, reflecting investments in store hours, wage rates and team member incentives. In terms of bottom line, the company’s GAAP EPS from continuing operations and adjusted EPS grew 9% y-o-y in Q1.

Digital Sales, Traffic Boost Comparable Sales 

Among the components of the reported 3.0% comparable sales in Q1, traffic grew a strong 3.7% y-o-y and the average transaction amount decreased 0.6% y-o-y. Target benefitted from strength in the home, household essentials, and food & beverage categories. Notably, Target’s digital sales grew 28% y-o-y in the first quarter after jumping 21% y-o-y in Q1 last year.

Company Guidance

In the second quarter, Target expects its comparable sales growth to accelerate into the low to mid-single-digit range, primarily due to increased sales in warm weather categories in May and an extra week of the back-to-school season in the quarter compared to last year. The company also expects a decline of about 40 basis points in its operating margin in the quarter. In addition, the retailer expects D&A expenses to come in about $40 million higher than last year, reflecting accelerated depreciation on assets taken out of service due to the remodel program. To add to that, the company expects its second quarter net interest expense to come in about $15 million lower than last year, and also expects an effective tax rate in the range of 22% to 25%. Altogether, the retailer expects GAAP and adjusted EPS of $1.30 to $1.50 in the second quarter. For the full year, the retailer is on-track to deliver its previous guidance for a low-single-digit increase in comparable sales and GAAP and adjusted EPS of $5.15 to $5.45.

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