Target Turns in a Significant Beat on Profits

In this segment from the MarketFoolery podcast, host Chris Hill and David Kretzmann of Supernova and Rule Breakers consider the latest earnings report from Target(NYSE: TGT), which shows the discount retailer is doing better at fighting the riptides dragging much of the brick-and-mortar segment under. How is it succeeding where others aren't? And what's the company's plan from here?

A full transcript follows the video.

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This video was recorded on May 17, 2017.

Chris Hill:We have some restaurantearnings we're going to get to, but let's start withTarget. Their first-quarter profitscame in higher than expected, I would say significantly higher than expected. Same-store sales fell a little bit. It wasn't too bad. Management,I love this quote,pleased with Target'sperformance in light of "avery choppy environment." God, that's putting it mildly when you think about retail over the last six to 12 months.

David Kretzmann:Yeah,it has not been an easy time for retailers or restaurants. Definitely a lot of changes anddisruptions happening forcompanies in thosespaces. Comps were still down 1.3% for the quarter, but Wall Street wasexpecting it to fall closer to 4%, so thisreally is a case of, "It wasn't as bad as we thought, so we won't punish the stock."

Hill:And Ron Grossmade this comment onMotley Fool Moneylast week, we werelooking at, particularly last week, whenyou looked at some of the big general retailers,Macy's,Kohl's,J.C. Penney,that sort of thing, andthe results were so bad across the board. And Ron made the point that, some of these aregoing out of business. This is capitalism,not everybody gets a trophy. Andit's unfortunate for the people who are going to lose their jobs, butsome of these aren't going to survive. I feel like Target is in a position wherethey can be one of the survivors.I haven't looked too closely at what they're doing in terms of e-commerce lately. But it does seem like they've put up good enough numbers often enough that they're in better shape in general.

Kretzmann:Yeah. I think they're better-managed. Theydon't break out what percentage digital makes up of their overall sales, but for this quarter, digital sales were up 22%. It seems like,pretty consistently over the past year or two, their digital saleshave been going between 20% to 30% clip. That'snice to see. It's probably still apretty small portion of overall revenue. They'realso investing $7 billionover the next three yearsinto technology, improving their supply chain. They'reremodeling a bunch of stores, they're launching a small-format concept where they'll have about 100 of those locations rolled outover the next three years or so. So, they're being moreproactive than a lot of retailers, which are justtaking the bad news as it comesand not really changing a whole lotin any meaningful way.

AndTarget is still in pretty solid financial shape. They generated almost $5 billion in free cash flow over the last year. So they'renot going anywhere. Theirdividend and share repurchases will be able to continue.I wouldn't be surprised if Target orWal-Martbuys someone likeWayfairor something,because I think this e-commerce battleis really going to heat up. And thesecompanies are only going to be able to do so much internally, as far as ramping up that e-commerce strategy. So I think, you'll see more and more companies, likePetSmartrecently buying,I forget what the name of it was, but it was the largest e-commerce acquisition ever. It might have been Chewy.com. Essentially anonline pet food business. PetSmart spent several billion dollarsacquiring them within the past month.I think it's inevitable that you will seeWal-Mart, Target, and some of these other retailers that, despite the troubles, are still generating a lot of cash, and they have cash they can put to work buying some of those pure-play online retailers.

Hill:I think the smaller footprint locations are going to be interesting to watch.I don't know if they've gone public with where the locations --I would be curious toactually walk through one of those and see how it differs fromthe big Target that's a few miles from Fool HQ, and seewhat they're doing differently, because like you said, done correctly, thatcould be something that they look to grow even more.

Kretzmann:Yeah, they'reexpecting to build 30 of them this year.I haven't looked into this too much,I would assume it's a similar strategy to whatWhole Foodsis doing with its small 365 concept, whereessentially you're able to get the storescloser to consumers.I think, especially for younger consumers, for the millennials, they valueconvenience more than anything else, andgetting those smaller stores with the key,essential, top-selling itemscloser to consumers, that could be a good way to go.

John Mackey, CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Chris Hill owns shares of WFM. David Kretzmann owns shares of Wayfair and WFM. The Motley Fool owns shares of and recommends Wayfair and WFM. The Motley Fool has a disclosure policy.