Shares of Target Corp. (NYSE:TGT) are near an all-time high following Wednesday's earnings report. After being hounded for the past several quarters by problems including a massive customer data breach and misguided expansion into Canada, which it pulled the plug on earlier this year, the big-box retailer's turnaround is on the right track.
For the opening quarter of 2015, adjusted earnings per share jumped 19% to $1.10, better than the company's guidance of $0.95 to $1.05, as comparable sales improved by 2.3%. Online sales grew by 38%, while comparable sales in several signature categories -- style, baby, kids, and wellness -- improved by more than double the overall comparable increase.
There are also other reasons to believe Target is headed in the right direction once again.
Reembracing the cheap chic image
In recent years, Target has moved away from the "cheap chic" brand identity that made it so successful in the first place. The company added groceries to its stores, thus taking on a lower-margin, undifferentiated product; it focused on low prices instead of exclusive merchandise; and rivals co-opted the cheap chic image, making it harder to stand out. Under CEO Brian Cornell, the company is once again focusing on exclusive merchandise and partnerships with designers. By retreating from that strength, the company might have begun to resemble Wal-Mart too closely, and it needs to focus on a higher-income market.
A partnership with designer Lilly Pulitzer proved so popular that it quickly sold out of the items in stock. While Target was criticized for the shortage, it was in part a victim of resellers buying the goods in bulk with the intention of selling them for a profit. One takeaway from the event is that demand for such partnerships is strong, and one of Target's advantages. On Thursday, Target announced its next designer collaboration, this time with jewelry designer Eddie Borgo, which is scheduled to launch on July 12.
Target is also moving toward organic and natural foods in order to focus further on a more upscale consumer than other discount retailers. The retailer said it will double its selection of organic and natural foods in 2015, and management expects the program to reach $1 billion in sales this year.
Then just last week, management said it would play down its promotions of some major food brands including Campbell Soup, General Mills, and Kellogg in order to give more space to niche, healthier brands. Management said the decision was made simply to reflect the demands of the changing consumer, but again it reinforces the idea of Target selling something special or a little different from the competition.
The man in charge
Cornell took the helm last August, bringing a new ground-up management philosophy to the business, soliciting feedback directly from customers, in an effort to improve the perception of the stores, which fell significantly under former CEO Gregg Steinhafel. According to BrandIndex, Target's perception score dropped from 54 in 2008, when it was ahead of Amazon.com, to just 31 in 2015, about even with Wal-Mart.
Cornell made the bold but necessary decision to pull Target out of Canada, forcing the company to take a $5.4 billion charge but saving it from years of bleeding profits. He has also doubled down on e-commerce, lowering the threshold on free shipping to $25, the lowest of the major retailers, and improving the platform.
Finally, his most important strategic decision could be focusing on the company key signature categories, such as style, home, baby/children's, and wellness. Cornell has given himself a three-year goal of revamping the brand image and performance.
Though plenty of work still needs to be done, Target seems to be reclaiming the customers it lost in previous years, and the first quarter performance easily beat expectations, allowing the company to lift its full-year guidance.
With that momentum, Target's motto: "Expect more, pay less" might now apply not only to customers, but to investors as well.
Jeremy Bowman owns shares of Apple. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com and 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.