Target (TGT 0.62%) recently posted its third-quarter earnings results. And for a change, the report was quite positive. The retailing giant managed to beat Wall Street expectations on the top and bottom lines, and outperformed rival Wal-Mart (WMT +0.36%) in the key metric of comparable store sales growth. By some measures it was the best quarterly performance that Target has seen in two years.
After the earnings announcement, new CEO Brian Cornell and other executives held a call with financial analysts to provide context on the results. Here are five key points that management made on that call (quotes are courtesy of Seeking Alpha).
Digital sales are a big opportunity
Target's digital sales are growing much faster than the industry, and they have been accelerating all year, and we are planning for even faster growth in the fourth quarter.
--CEO Brian Cornell
Online sales grew by 30% over the prior year, which was enough to move the needle on overall comparable store sales. In fact, management said that digital sales contributed about half of the surprisingly strong 1.2% comps growth in the U.S. this quarter. Target is attacking the online opportunity from a number of angles, including its rollout in October of a national ship-from-store capability that management believes will help it win even more digital orders over the holidays. The company expects this category to accelerate growth next quarter to a 40% rate.
U.S. traffic trends are still negative
The pace of US traffic continues to recover from a very challenging trend earlier in the year. While US traffic still declined slightly in the third quarter, performance was more than a full percentage point stronger than traffic trends through the first half of the year.
--CEO Brian Cornell
CEO Brian Cornell. Source: Target
Target has suffered from declining traffic for eight consecutive quarters, but that trend could finally be reversing. Customer traffic fell by 0.4% in the third quarter, as compared to a 1.3% dip in the prior quarter and a 2.3% drop in the first quarter of the year. Importantly, those traffic improvements aren't coming at the expense of profitability. Target has managed to decrease its level of promotions, with gross margin heading slightly higher.
For Canada, it might all depend on the holidays
We know that to succeed in Canada we will need a major step change in performance. The fact is, given where we are performing today, we need to see improved financial performance from every Target store in Canada over time.
-- CEO Brian Cornell
The Canadian business continues to be a huge drag on Target's earnings. That segment lost $211 million in the quarter, or hardly better than the $240 million loss from a year ago. Management has made a host of changes aimed at giving that market its best chance at success over the crucial holiday season. Those include a nearly complete change in the merchandise available in the stores. However, executives are prepared to consider big strategic shifts if things don't work out that way, including perhaps exiting the market. Cornell said the company will be "assessing our longer-term potential in Canada" through the holiday quarter.
Winning Black Friday and the holidays
We know our guests are pulled in a million different directions as the holidays get under way, so we are helping them save time and money by offering more access to Black Friday deals.
--Chief Merchandising and Supply Chain Officer Kathee Tesija
Target is going beyond the simple "open earlier" approach to Black Friday retailing competition this year, including by adding a sale on company gift cards for the first time in its history. Shoppers can buy up to $300 worth of Target gift cards for 90 cents on the dollar on the morning of Black Friday. The company is also pushing online initiatives to the top of its holiday strategy in hopes of capturing a bigger slice of e-commerce sales. Those initiatives include lightning deals through its popular Cartwheel app and a full week of cyber deals beginning Dec. 1 through the Target website.
Cautious outlook for next quarter
We are continuing to plan cautiously and maintaining our prior full-year guidance despite stronger than expected third quarter performance.
--Chief Financial Officer John Mulligan
Despite falling gas prices that could push consumer spending higher, and despite this quarter's outperformance, Target held its full-year guidance unchanged. Management expects comps to grow by a solid, but unspectacular 2%. Sales are trending above that figure for now, but executives cautioned that the intense competition around the holidays provide enough reason to be conservative.
Overall, investors found a lot to like in Target's third quarter report, sending the stock higher by 7% in the wake of the announcement. The company faces some major risks including its Canadian market struggles and a highly competitive holiday season. But encouraging trends on digital sales and in-store traffic give CEO Cornell some solid momentum to build on as he gets up to speed in his new job.
