More customers are shopping at Target (TGT 0.18%) these days, and they're increasingly buying high-margin products from the clothing, home, health, and baby categories. Those two trends combined to power solid sales profit growth for the retailer's second-quarter results, released this morning.
Overall, revenue met Wall Street's expectations as profit trounced forecasts by $0.11 per share:
| Metric | Estimated | Actual |
|---|---|---|
| Revenue | $17.4 billion | $17.4 billion |
| Profit | $1.11 per share | $1.22 per share |
Estimated is the average forecast of the 24 analysts who cover the stock. Sources: Yahoo! Finance and Target financial filing.
Sales and profitability growth
Target posted comparable-store sales growth of 2.4%, which was at the high end of the forecast that management issued last quarter. The increase was driven by a steady 1.6% gain in customer traffic along with a slight uptick in average spending per customer. Target's online business also contributed a healthy 0.6 percentage points to the comps growth figure.
Each of those metrics stack up well against rival Wal-Mart, which posted its second-quarter results yesterday. The retailing giant's comps growth (1.5%), customer traffic gain (1.3%), and e-commerce contribution (0.2 percentage points) all trailed Target's just-announced figures.
Source: Target.
Target did particularly well within what management calls its "signature" categories, which include clothing, baby, home, and health. Those segments grew at three times the sales pace of the rest of the company. And because signature categories carry higher price points and profit margins than commodities like groceries, their growth powered a nice uptick in profitability. Gross margin improved to 30.9% of sales from 30.4% last year.
Target also managed to lower its costs in the quarter: Expenses fell by 3% despite the higher sales base. As a result, pre-tax earnings shot higher by 30%. "We're very pleased with our second quarter financial results, as traffic growth, strong sales in our signature categories and continued expense discipline drove better-than-expected profitability," said CEO Brian Cornell.
Lifting the outlook
That surprising earnings growth led to an increase in management's full-year profit outlook. Cornell and his executive team now see adjusted earnings of as much as $4.75 per share, up from the $4.65 target they laid out last quarter. That's another trend that contrasts favorably with Wal-Mart, which lowered its 2015 profit forecast yesterday as profitability in its U.S. business declines.
Target's updated forecast leaves the stock priced at roughly 17 times adjusted earnings, compared to WMT''s 14 P/E ratio. Investors might not see that valuation as an obvious bargain, given that Target likely won't post more than 2% comps growth for the full year. But management apparently believes the stock represents a good value right now. After pausing buybacks for almost two years, they have spent $1.2 billion on repurchases in just the last six months.
Meanwhile, Target will have to keep executing at a high level, both in stores and online, if it wants to fend off rivals through the cutthroat back-to-school and holiday retailing seasons over the next two quarters. "While the momentum in our financial results is encouraging, we have much more to accomplish," Cornell said.
