Just days into his second year leading Target (TGT +0.36%), CEO Brian Cornell had good news to report to investors. The retailer booked steady customer traffic gains in the second quarter, which helped profit growth smash expectations. The stock reacted by pushing to a new all-time high.
After announcing the results, Cornell and his executive team held a conference call with Wall Street analysts to put the latest figures into context. Here are five key points that management wanted to get across in that chat.
Signature categories
Comparable sales in "signature" categories grew more than 7% in the second quarter, three times our overall comp growth. -- Cornell
CEO Brian Cornell. Source: Target.
Target's "signature" categories include apparel, home, beauty, baby, kids, and wellness. These segments differentiate the retailer from peers, as opposed to areas like grocery where Target is up against intense competition from discount rivals.
Products in the signature categories tend to carry higher profit margins than the rest of the store. So it's good news that comparable sales rose 7% for those categories compared to 2% for Target as a whole.
The signature categories' lead over the company average grew from two times in the prior quarter to three times this quarter, Cornell told analysts.
Digital priorities
Digital channel sales increased 30% in the second quarter on top of more than 30% growth in the second quarter last year. -- Chief Operating Officer John Mulligan
Online selling contributed one quarter of Target's 2.4% total comparable sales growth as e-commerce ticked up to 2.7% of total sales from 2.2% a year ago. Management plans to direct plenty of extra resources into this sales channel. In fact, it's "critically important" that Target become a leader in the space, Cornell said.
The team aims to make progress toward that goal through initiatives like shipping orders from Target stores rather than only from distribution centers. Digital orders are being delivered from 140 stores right now, but will be leaving from over 450 locations by the end of the year, cutting shipping times dramatically.
Efficient operations
On the expense line, we had a standout quarter with a rate improvement of about 60 basis points compared with last year. This performance was driven by outstanding discipline across the enterprise combined with the benefit of our cost control initiatives. -- Mulligan
Target's gross margin rose from 30.4% of sales to 30.9% thanks to those popular signature categories and fewer markdowns throughout the store. But the company also held the line on costs: Expenses fell by 3% even as sales rose by 3%. As a result, adjusted earnings spiked higher by 21%, or a full $0.08 per share above the high end of management's forecast.
More capital returns
With healthy business results and an ample cash position, we expect to have the capacity to continue to return a meaningful amount of cash through both dividends and share repurchases. -- Mulligan
Target paid out $331 million in dividends this quarter, up 22% from the prior year. And it spent $675 million buying back shares, for a total cash return to shareholders of just over $1 billion. With business results improving, investors can expect both of these cash return categories to keep growing.
Competitive holiday ahead
We expect the consumer competitive environment to remain choppy. -- Mulligan
Management's updated outlook calls for more sales and profitability growth next quarter, but at a slower pace than we saw this quarter. Comps should improve by between 1% and 2%, and gross margin should tick higher by as much as 0.3 percentage points.
The company has been outpacing that sales growth forecast through the first few weeks of the quarter. But executives expect fierce competition around the back-to-school and Christmas shopping seasons and are therefore staying conservative with their 2015 targets. "We remain mindful of the intensely competitive nature of our holiday season," Mulligan said.
