While everyone was forecasting doom and gloom for Target (NYSE: TGT) this earnings season, the company solidly beat expectations when it reported May 17, defying the recent shakeout in retail. I use "solidly beat" loosely, as the company had forecast very pessimistic numbers last time while attempting a bold turnaround.
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On its call, the company gave several data points on new initiatives, most of which showed good progress. Here are the key takeaways investors need to know.
In the last quarterly call with analysts, Target said it was "investing in price" (also known as dropping prices) to drive traffic. As such, same-store sales declined 1.3% in the just-completed quarter and gross margins compressed 0.4% year over year. Same-store sales declines factored in both lower traffic and lower basket size, so lower prices are not yet translating into higher traffic. Transcript via Seeking Alpha.
CFO Cathy Smith said:
Basically, Target says it needs better messaging around value, which management hopes will lead to increased traffic.
On a positive note, COO John Mulligan talked up several interesting delivery initiatives. One is in New York City, where Target only recently opened stores and is now testing same-day delivery to customers who order in-store. Lots of people don't really drive in New York City, and carrying a full bag of goods to your apartment isn't exactly pleasant. If all goes well with the test, the company will expand to other cities.
The company also unveiled Target Restock, which allows customers to order a large box of essentials online and have it delivered to their homes. The company is testing in St. Paul and Minneapolis with Target's REDcard holders this quarter, and will roll the plan out more broadly if it works.
The company also said the percentage of in-store pickup orders ready within an hour increased from 92% to 95% in the quarter. Ship-from-store volume made up 27% of digital sales, and stores that have had shipping capabilities for more than a year increased ship-from-store volumes 32%. This is key, as part of Target's strategy is to leverage its large store base to reach delivery customers quickly and compete with Amazon (NASDAQ: AMZN).
Image source: Target.
CEO Brian Cornell highlighted the 22% increase in digital sales, as well as new web features such as a 360-degree "shoppable" living room. With this interface, customers can browse products inside a fully decorated virtual room, which will give them a better sense of products' size and dimensions. The company plans to make more digital enhancements over time, so stay tuned for any new features along these lines.
Smaller format and renovations
Another part of Target's strategy is smaller-format stores that fit better in urban environments. These stores yielded positive results this quarter. In the 10 "mature" small-format stores in the footprint, same-store sales increased by double digits on average, the company said. Moreover, small-format stores have twice the "sales productivity" of larger stores. Of course, with over 1,800 stores nationwide, small-format stores make up a tiny portion of the base, but the company plans to roll out 30 small stores per year for the next three years.
Target is also planning 600 store remodels, or one-third of the store base. So far, the company says it is seeing a 2% to 4% sales uplift after a remodel, so that's another promising sign, should trends continue.
Competitor closures are opportunities
Finally, Target benefited from the closures of poorer-positioned retailers in the quarter. For example, L Brands pulled back on its Victoria's Secret swimwear line, opening the door for Target, which was able to rapidly release a new brand, Shade & Shore, in the quarter. This was very successful, and management plans to launch 12 exclusive new brands over the next two years.
While Target has suffered recently, like other retailers, its turnaround initiatives showed promise this quarter, though it's still early innings. It's worth watching as Target tries to transition.
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