Please ensure Javascript is enabled for purposes of website accessibility

Target Pays a Steep Price for More Customer Traffic

By Demitri Kalogeropoulos - Updated May 25, 2018 at 9:04AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Customers packed the retailer's aisles this quarter, but operating profits still fell.

Target (TGT 0.81%) has made it clear to investors that they should brace for lower profitability in the business as the retailer invests in the digital sales channel and cuts prices at its physical locations. The good news is that those initiatives yielded solid sales growth to kick of Target's fiscal 2018. However, the company had to sacrifice a chunk of its earnings power to achieve that top-line expansion.

Let's take a closer look at the first-quarter results.


Q1 2018

Q1 2017

Growth (YOY)


$16.6 billion

$16 billion


Net income

$718 million

$678 million


Earnings per share




Data source: Target's financial filings. YOY = year over year.

What happened with Target this quarter?

Sales growth held up well and nearly matched Target's strong holiday-quarter results thanks to solid customer traffic numbers. Yet the company's profitability fell at a quicker pace than management had projected

Two women next to a clothing rack, examining a shirt

Image source: Getty Images.

The key highlights of the quarter included:

  • Comparable-store sales rose 3% thanks to a 3.7% spike in customer traffic that marked Target's best performance on that metric in a decade. Target outpaced rival Walmart, which only lifted customer traffic by 0.8% in the period as comps rose 2.1%.
  • E-commerce sales jumped 28% and now make up 5.2% of total revenue, up from 4.2% a year ago.
  • Average spending per shopper declined, in part because of lower prices that pushed Target's gross profit margin down to 29.8% of sales from 30% a year ago. Operating costs jumped, too, due to increased investments in the digital business. As a result, operating income declined 10% to $1 billion.
  • A sharply reduced tax liability lifted net profits even though operating income dropped. 
  • Target spent $827 million on capital investments while returning about the same amount to shareholders through dividends and stock buybacks.

What management had to say

Management highlighted its customer traffic wins, which came despite unfavorable weather in April. "We're very pleased that our business continued to generate strong traffic and sales growth in the first quarter," CEO Brian Cornell said in a press release.

"Our performance," he continued, "reflects the benefit of our unique multi-category portfolio. Strong sales growth in our home, essentials and food & beverage categories offset the impact of delayed sales in temperature-sensitive categories." The gains resulted in "broad market share gains across its core merchandise categories," according to the press release

Looking forward

Cornell and his team said they've seen that positive traffic momentum accelerate into the start of the second quarter, just as other retailers like Walmart and Home Depot have noticed. That means comps could reach into the mid-single-digit range for the current quarter. However, Target left its full-year outlook in place, which calls for only modestly higher sales in 2018.

The profit outlook isn't as bright. Target posted a 13% drop in operating earnings in 2017 and, while executives warned that this year will also be an investing year, they are hoping to slow that slide before eventually expanding profitability again. Time will tell where the retailer's profit power lands after it completes its transformation into an omnichannel seller. But this quarter's weakening metrics point to more declines ahead, especially as Target rolls out its same-day online delivery services nationwide.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Target Corporation Stock Quote
Target Corporation
$142.38 (0.81%) $1.15

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/04/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.