Shares of big-box retailer Target (TGT 0.88%) rallied after a good second-quarter report delivered to investors on Wednesday. Management had lots of updates to share as the turnaround strategy announced at the beginning of this year looks like it is beginning to yield results.
Q2 2017 by the numbers
Target's quarterly sales increased 1.6% year-over-year to $16.4 billion. Driving that revenue growth was a 1.3% comparable-store sales increase, plus a little extra from the handful of the company's new small-format store openings, and a 2.1% increase in store traffic. Digital sales grew 32% and now make up 4.3% of total revenue, continuing Target's good work in playing catch-up to online-only retailers. Digital sales added 1.1 percentage points to the overall comps growth. Check out the table below for details on online sales.
|
Metric |
Full-Year 2016 |
Q1 2017 |
Q2 2017 |
|---|---|---|---|
|
Year-over-year online sales increase |
29% |
22% |
32% |
Chart by author. Data source: Target quarterly earnings.
The Q2 comps results were a big reversal from the first quarter, when the double-digit rise in internet sales was not enough to offset shrinking store traffic and less spending by customers. Comp sales were down 1.3% overall in Q1 and management at the time predicted a low-single-digit drop in full-year comps. In the Q2 report, management said it was expecting full-year comps to be basically flat.
Investors also saw a positive result on the bottom line in the second quarter, when earnings per share were $1.22, 5% higher than last year and well above the high end of guidance given in the first quarter of a $1.15 per share.
Image source: Target.
Blue skies ahead?
Early in the year, Target CEO Brain Cornell outlined a multibillion-dollar and multiyear overhaul to operations. The plan was greeted with skepticism as the investments in digital sales, store remodels and openings, and new private brands would pressure the bottom line.
Data by YCharts.
Though it's still early on in efforts, the second-quarter results show that Cornell and the management team's plan could be starting to pay off. Here are the high points from management's updates:
- Target is on track to remodel more than 100 stores in 2017 and more than 600 stores through the next few years. The company will also be doubling the number of small-format stores with a goal of more than 100 in urban, suburban, and college campus neighborhoods. So far, these new stores are posting high single-digit comps growth. Target has 45 small-format stores across the country and plans more than 130 by the end of 2019.
- Part of the reinvestment plan outlined early this year was to make Target stores double as fulfillment centers, which makes delivery to customers quicker. Work on updating store delivery capabilities are underway, as are new employee capabilities like being able to electronically search companywide inventory and schedule delivery for store guests.
- Target Restock, a next-day delivery service of essential household items in the Twin Cities area of Minnesota is being expanded. Based on early results from the test, the program is expected to launch to handful of locations in the Twin Cities area for customers to use this fall.
- A same-day delivery service in which customers at checkout can opt to have their items delivered to their home on the same day began testing in the Tribeca store in New York City in the second quarter and will be expanded to several other New York City locations this fall.
- The company is testing curbside pickup.
- To supplement the fast-delivery efforts, Target announced the acquisition of Grand Junction earlier in the week, a San Francisco-based transportation technology company.
What to look for next
Management struck a more upbeat tone than last quarter for the balance of 2017. Investors should expect full-year comparable sales growth to be about flat, plus or minus 1%. Earnings per share guidance is now $4.35 to $4.55, compared with prior guidance of $3.80 to $4.20. That's a big jump in expectations, but still down from the 2016 amount of $4.58.
The Target transformation is still underway and is expected to continue dragging on bottom-line profits. Though the big retailer isn't out of the woods yet, this last quarter was nonetheless an encouraging one.
