It's been no secret to investors that Target (NYSE:TGT) is enjoying an operating rebound right now. Like its bigger rival Walmart (NYSE:WMT), the retailer recently posted some of its best growth numbers in years. Customer traffic was up in 2018, both in stores and online, and the multichannel sales strategy is delivering the growth management hoped it would. By weaving the digital channel into its physical retailing footprint, Target is supporting both segments and keeping its shoppers happy at the same time.
Those positive trends were the key drivers behind the retailer's solid fourth-quarter earnings report, which capped off an impressive fiscal 2018. But the best news for investors in that announcement was the fact that Target's profitability is finally stabilizing following two years of painful declines.
Steady growth numbers
The holiday season trends didn't deviate much from the pace investors have seen from the retailer all year. Comparable-store sales improved by 5.3% to roughly match the past nine months. Those gains were split evenly between growth in the online business and higher sales at stores. Target posted a slight slowdown in customer traffic gains, but the 4.5% increase still put growth at 5% for the full year, a 10-year-plus high, according to the management team. Walmart sounded a similarly positive tone in its mid-February report by noting its two-year pace of comps gains was its best result in nine years.
Target endured a few cost pressures, just as it has in recent quarters. Gross profit margin declined thanks to higher supply-chain costs and the shift toward more e-commerce sales. However, the big-picture profit trends offered plenty for investors to get excited about.
Stabilizing operating profits
Operating profit declined slightly over the holidays, but only because the prior-year period included an extra sales week. After accounting for that shift, operating margin held steady at 4.9% of sales. Zoom out, and investors can see the positive overall trend in this profitability figure. Operating income ticked down by less than 3% compared to a 13% dive in the prior year.
Better still, Target's outlook calls for a mid-single-digit increase in profits in 2019. Based on its sales growth guidance, that projection implies flat or slightly improving profitability this year. In other words, the retailer believes the profit-pinching part of its shift toward a multichannel selling posture is over.
In the days just before the peak holiday selling period started in late November, CEO Brian Cornell and his team said that the full 2018 results should establish a benchmark for profitability going forward despite all the heavy investments in the business lately. "We've been clear that all of our efforts to grow and transform Target," Cornell said, "involve a commitment of resources."
This latest earnings report shows that all the spending is paying off by boosting market share across its selling channels. But the more encouraging news is that Target's two-year profitability slide appears to be ending, and now the chain is entering 2019 well-positioned to log its first pre-tax earnings uptick since 2015.