Target (NYSE:TGT) announced surprisingly strong first-quarter earnings results on Wednesday. The retailer's profit bounced higher by 20% and comparable-store sales growth came in ahead of management's February forecast.
After the announcement, CEO Brian Cornell and his executive team held a conference call with Wall Street analysts to provide details on the first-quarter results. Here are five important points that management wanted to relay to shareholders in that presentation.
"Our first quarter comparable-sales increase of 2.3% was just ahead of the guidance of 2% we provided at the beginning of the quarter." -- Chief Financial Officer John Mulligan
Target's 3% overall revenue gain was powered by a 2.3% comparable sales boost. While that's no blowout result, it's significantly better than what rival Wal-Mart managed. The retail giant last week posted a 1.1% comp gain.
In the conference call, management stressed that Target's comp growth didn't come solely from higher prices, but also from a steady uptick in customer traffic.
The digital strategy
"Our digital sales growth of nearly 40% on top of 30% growth a year ago shows that we have a meaningful opportunity to generate comp sales growth through investments in digital channels." -- CEO Brian Cornell
E-commerce also contributed to growth this quarter, adding 0.8 percentage points to overall comps. Target got a nice boost by lowering its free shipping threshold to $25 in February.
But that investment paid off quickly. Online shoppers purchased more expensive products than their in-store counterparts. And they bought a lot of home and apparel products, which are more profitable items for Target. Executives were happy with that result. But they said that Target has much more ambitious goals for its online store in the years ahead.
Signature categories are key
"We benefited from very strong mix of sales in our signature categories this year, both in stores and online." -- CEO Cornell
Target books its highest profit margins on sales in its signature categories (including clothing, home, health, and baby) as compared to its lower-margin groceries and electronics businesses. That's why management is focusing investment in those core areas.
The benefits were clear this quarter: Target posted what management described as a "very strong mix of sales in our signature categories, both in stores and online." And the result was a full percentage point increase in gross margin, roughly twice what Target had expected.
Profitability is growing
"We grew sales and traffic while replacing promotionally driven sales on lower margin items with higher margin sales in signature categories, and the benefit to our [bottom line] was compelling." -- CFO Mulligan
Earnings rose by 20% this quarter, which beat analysts' expectations for a 15% gain. Management credited lower markdowns as compared to the prior year's data breach period.
But even more important was a shift in the sales mix toward Target's profitable signature categories. "This shows the value of our focus on driving growth in the signature categories," CFO Mulligan said.
Buybacks are back
"The improvements in our business results and cash balance have positioned us to once again return cash through share repurchase." -- CFO Mulligan
Management spent almost $600 million buying back its stock this quarter, marking the first time it made such purchases in almost two years. Target was in an awful financial position over that time as it struggled with declining customer traffic after the data breach, along with spiking costs from its doomed Canada expansion.
However, executives believe the company has turned the corner on cash generation. It can now afford to spend heavily on returning cash to shareholders through dividends and stock buybacks, management said. In fact, Target's improving results have the team expecting to spend $2 billion on stock repurchases this fiscal year.
Demitrios Kalogeropoulos owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.