Investors are gaining confidence in Target's (TGT +1.45%) rebound strategy. The retailer's shares are trouncing the market so far in 2018 while outpacing rivals like Walmart (WMT +0.99%) by a wide margin.
That impressive performance came despite the fact that profitability dropped in Target's most recent quarter. It also sets up a high bar for the second-quarter report that's due out before the market opens on Wednesday, Aug. 22.
Let's take a closer look at what investors can expect to see in that announcement.
Image source: Getty Images.
Strong sales growth
First, look for head-turning top-line growth for the quarter. The retailer's 3% comparable-store sales boost last quarter marked just a minor slowdown from its booming holiday period. But the even better news for investors was that customer traffic accelerated for the second straight quarter, rising to a 3.7% increase from 3.2% in the prior quarter. That was Target's best performance on that metric in more than 10 years, in fact, and it also far outpaced Walmart's 0.8% traffic uptick.
Executives said in late May that customer shopping trends strengthened further during the first few weeks of the second quarter as warmer temperatures finally arrived in key parts of the country. Target's growth initiatives, including store redesigns, price cuts, and brand launches, are also resonating with customers. "We are seeing multiple drivers of the recent acceleration in our performance," CEO Brian Cornell said in a conference call with investors. Thus, it's likely that Target will announce market-thumping sales and traffic gains on Wednesday.
About those profits
Target's management team believes there's still a bright future ahead for in-store shopping, but they also know they need to do whatever it takes to win in the e-commerce sales channel. The shift into multichannel retailing protected sales gains last year but hurt profitability, with operating income dropping 10%.
Target has good company in this challenge, as most of its peers are struggling with similarly difficult profit margin trends.
TGT Operating Margin (TTM) data by YCharts.
Executives have predicted that its declines will stabilize in 2018, but that didn't happen last quarter. Instead, Target posted a surprising drop in gross profit margin. Operating costs jumped, too, due to higher spending in the digital infrastructure.
The company blamed unseasonably cold weather for most of the profit shortfall and backed up those words by affirming its full-year profitability targets. As a result, investors will be looking for steady or slightly higher gross margins in the upcoming report.
The updated 2018 outlook
With two full quarters of the year behind it and with preparations for the upcoming holiday shopping season well under way, Target should now have a better idea of how its 2018 will likely unfold. That means investors might see a significant revision of the retailer's outlook on Wednesday.
Right now, that forecast calls for low-single-digit sales growth that would probably mark its second straight year of accelerating revenue gains. Target's sales fell by 0.5% in 2016 and rose by 1.3% last year.
Adjusted earnings are currently seen dipping slightly to around $5.30 per share from $5.35 per share last year. The longer-term outlook predicts a return to core earnings growth in 2019 in the context of steady but modest sales growth. Yet executives might lift those predictions on Wednesday if Target's positive first-quarter momentum carried on into the second quarter.
