Target Q3 tops Street but holiday forecast worries
A warning about a “highly competitive” holiday season overshadowed what was, in many ways, a positive quarter for Target Corp.
Sales rose 1.4% to $16.67 billion in the quarter, up from $16.4 billion in the year-ago period. Analysts had expected $16.61 billion.
Same-store sales inched up 0.9%, also more than expected. Comparable traffic grew 1.4%.
Target’s comparable digital channel sales increased 24%, and contributed 0.8 percentage points to comparable sales growth. Target’s online sales now account for 4.3% of total sales, up from 3.5% last year.
Net income fell to $480 million, or 88 cents a share, amid higher costs, compared with $608 million, or $1.06 per share, a year earlier. Adjusted earnings per share were $0.91, compared with a forecast profit of 86 cents per share, and down 13.1% from the same period last year.
Target devoted $847 million to capital investment in the quarter, during which it opened 12 stores and completed 37 store remodels as part of its ongoing store overhaul initiative. It said it seeing an average 2%- to 4% comp sales lift in remodeled units.
The chain’s quarterly SG&A expense rate was 21.1%, compared with 20.3% last year, driven by higher compensation costs. Starting in October, its minimum hourly wage was increased to $11 per hour.
“We’re very pleased with Target’s third quarter performance, including traffic and sales growth that demonstrate we’re building on the progress we saw in the first half of the year,” said Brian Cornell, chairman and CEO. “The investments we’re making in our business will help Target drive long-term success and ensure we’re well positioned to deliver for guests in the all-important holiday season. While we expect the fourth-quarter environment to be highly competitive, we are very confident in our holiday season plans.”
Analyst Neil Saunders, managing director, GlobalData Retail, commented while Target is making progress, it needs to be bolder and more creative.
“Many legacy issues, such as a lack of stock control which leaves frequent gaps on shelves, also need to be resolved,” he noted. “All that said, the company is now in a much stronger position than it was at this time last year which bodes well for the holiday quarter and beyond.” For more, click here.
For the fourth quarter ending in January, Target expects per-share earnings to range from $1.05 to $1.25, missing Wall Street projections for $1.27. It Target expects fourth quarter 2017 comparable sales growth of flat to 2%.
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Analysis: Target making the right moves—but needs to be bolder and more creative
With both total and comparable sales in positive territory, the latest results from Target are undoubtedly another step in the right direction. Unfortunately, the pace at which the company is moving is slow, as attested to by the modest 0.9% increase in same-store numbers. It has also cost the company a great deal to travel even this short distance, with both operating profit and net income down sharply over the prior year.
All of this raises two questions. Is Target on the right track? And, is the effort and expense of the company’s turnaround worth the potential reward? We believe that the answer to both queries is yes, albeit with some reservations.
On the expense question, it is a fact that no retailer of Target’s scale and size can implement a quick turnaround in today’s retail market. The process of reinvention takes time, effort and money – all of which have to be expended before any eventual rewards are reaped. In Target’s case, pressure on the bottom line has come from increased staffing costs, lower prices, and improvements to stores and products. In our view, these things should not be seen as costs, but as investments in the future of the company. Without them, we believe Target’s future would be bleak.
The second question flows from this. If Target needs to invest, is its current strategy going to deliver? Over the past few months, we have undertaken extensive analysis on Target’s reinvention process, visiting new and refurbished stores, analyzing sales patterns, surveying shoppers, and talking to staff. From this, we conclude that Target is making the right moves. However, we also recognize that there is room for improvement.
One of the most significant blocks of investment is that directed at store refurbishment. Here, Target is completely reinventing the in-store experience by creating a more open format with improved visual merchandising and a more logical layout. Decor, fixture design, lighting, and signage are also being upgraded. The early results of this process are positive. Target’s Talking Stick store in Arizona has gone from being a dingy, down-at-heel shopping experience to an attractive, modern space which is pleasant and comfortable to shop.
Our customer survey data show that shoppers have both recognized the transformation and are positive about it. Customer satisfaction for Talking Stick customers, for example, rose significantly after the conversion. Our initial data indicate that metrics like frequency of shop, amount of time spent in the store, and average basket size are all rising. However, they are doing so at a gradual pace which suggests to us that the return on the improvement expense will only accrue over time. This is one of the reasons why store only comparables increased by a meager 0.1%, with the rest of the increase coming from the digital operation.
Just as store improvements have been welcomed by customers, so too have Target’s new own brands. In apparel, Goodfellow & Co and A New Day are gradually attracting the attention of younger, fashion-conscious shoppers and we believe Target is starting to see better clothing sales as a result. However, this process is gradual: it is taking time to persuade people who have never bought clothing at Target to look again at the offer.
One slight concern we do have with the new brands is the execution in store, especially for the Project 62 home label. As much as the styling and positioning are solid, the assortment available in most shops is limited, and the way in which it is merchandised is poor. It is almost as if Target lacks the confidence to push this range heavily. In our view, Target needs to be bolder with these new brand assets if it is to attract more customers and improve sales.
Pricing has been another area of expense, especially on the grocery side of the business. As much as this has helped to drive some sales, we maintain our view that Target lacks a comprehensive food strategy. This part of the operation will not see significant traction until Target comes up with much clearer points of differentiation – something that still appears to be a long way off.
As much as Target is making progress, we believe it needs to be bolder and more creative. Many legacy issues, such as a lack of stock control which leaves frequent gaps on shelves, also need to be resolved. All that said, the company is now in a much stronger position than it was at this time last year which bodes well for the holiday quarter and beyond.
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