3 Key Takeaways from Target’s Fiscal First-Quarter Report
Target's (NYSE: TGT) share price performance for the year dipped below that of the broader stock market in recent weeks, suggesting investors were taking a "show me" approach to the retailer's business. Management issued an aggressive outlook back in March that predicted market-share wins across its digital and physical selling channels, as well as profitability improvements. That would be a high bar for any company to clear, and most analysts who follow the stock were more cautious in their expectations for its sales and earnings growth.
Yet in its fiscal first-quarter report this week, the retailer revealed it had made solid progress toward all of its key growth objectives. Together, these wins imply Target is having no trouble standing out in a competitive sales landscape.
Let's take a closer look.
1. The growth momentum continued.
The key growth question was whether Target could maintain its momentum after setting a new record for sales gains in its fiscal 2018. The answer was a resounding "yes." Same-store sales gains landed at 5% for the quarter that ended May 4, roughly even with the holiday quarter's comps rise. That result stacked up well when compared to Walmart's (NYSE: WMT) 3% fiscal Q1 gain.
Target is succeeding in both of its sales channels. Customer traffic rose by more than 4% in stores. Meanwhile, digital sales jumped 42%, and the company's overall comps growth was almost evenly split between e-commerce and in-store gains. CEO Brian Cornell trumpeted that broad-based success in the earnings press release: "Target had an outstanding first quarter as our team delivered a great experience for our guests and drove strong growth in traffic, comparable sales, operating income, and earnings per share," he said.
2. Profits are rising.
Although Target's profitability has generally been stronger than Wal-Mart's, it had been falling since Target embarked on its transformation strategy two years ago, with operating margin declining from above 7% in late 2016 to just 5.5% toward the end of 2018. Those declines were driven by huge investments in the digital selling channel and in remodeling stores, as well as price cuts. While admitting that the new multi-channel selling posture might deliver lower margins, executives said in recent quarters that they were gaining confidence that profitability would stabilize and begin to rebound soon.
That's exactly what happened this quarter: Target's operating margin ticked upward to 6.4% of sales. Better yet, this boost occurred despite the extra expenses that Target and other retailers are dealing with today, including price inflation and higher supply chain and labor costs.
3. The outlook is bright.
Even in light of its 2018 sales growth wins, Target's initial outlook for 2019 appeared optimistic. Specifically, Cornell and his team predicted rising traffic both in stores and online, and "strong market share gains" across "every major category...both stores and digital." Talk about setting a high bar.
On Wednesday, the team supported those predictions with healthy operating metrics, and affirmed the broader 2019 forecast. Target still believes comps will rise at around the same pace as last year, and that operating income will expand at a quicker rate.
Given that Target's stock price jumped in the hours following the report's release, it looks like investors are growing more confident that the chain can achieve its aggressive goals. If it does, the retailer will have notched two consecutive years of market share growth while positioning itself for healthier cash flow and rising earnings in 2019 and beyond.
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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.