After a long retailing slump, Target (NYSE:TGT) is back to posting consistent, if small, sales growth. The company announced third-quarter earnings results last week that marked its 12th straight month of customer traffic gains.
CEO Brian Cornell and his executive team held a conference call with investors to discuss those results while updating Wall Street on their outlook for the critical holiday season ahead. Here are five key points management wanted to get across in that presentation:
Turning the corner on customer traffic
We are really pleased that our guests are responding to the investments we're making in our assortment, presentation, and shopping experience.
-- CEO Brian Cornell
Target's 1.9% comparable-store sales gain outpaced management's forecast, with the biggest contributor to the beat being rising customer traffic. The company logged a 1.4% traffic boost to go along with a 0.4% uptick in average spending.
While encouraging, those figures could be better. After all, traffic growth was nearly 2% in the prior quarter. Target also trailed Wal-Mart (NYSE:WMT) here, which managed a 1.7% third-quarter traffic improvement in its U.S. stores.
Target executives stressed that customer traffic is the one number they're most interested in boosting -- mainly through initiatives that improve the shopping experience. "We are laser focused on his metric as a key indicator of the health of our business over time," Chief Financial Officer Cathy Smith said.
Focusing on signature categories
Comp sales growth was led by signature categories which grew more than two and a half times as fast as our overall sales.
Boosting sales in Target's high-margin "signature" categories (including baby, beauty, apparel, and wellness) is a major strategic focus for management. And as it did with customer traffic, the retailer made progress in this goal -- but at a slightly slower pace than last quarter. Signature categories grew at 2.5 times overall sales growth, down from a 3-times growth pace in Q2. That relative slowdown played a role in Target's profitability slipping, year over year, from 29.5% of sales to 29.4%.
Improving the online business
We believe we have an opportunity to accelerate digital transactions by enhancing the experience on Target.com.
Target's online growth slowed down from the prior quarter -- rising by 20% compared to 30%. As a result, e-commerce sales contributed significantly less to comps growth -- 0.4 percentage points compared to 0.6 percentage points in Q2.
Management isn't happy with those results and intends to keep directing investments into the Target website, shopping app, and delivery options. "Our store teams are working diligently to support Target's efforts to become more flexible in the way we fulfill guest demand," Chief Operating Officer John Mulligan said.
Sending more cash to shareholders
We continue to have capacity to invest in our business, while returning a compelling amount of cash to our shareholders.
As it suffered under the weight of financial losses tied to its failed Canadian expansion, Target suspended stock buyback spending for almost two years. But with international losses behind it, and with the U.S. businesses steady again, management has turned the repurchase spigot back on.
The company spent almost $1 billion buying back stock this quarter, in addition to $352 million in dividend payments. Investors can expect cash returns, particularly share repurchases, to keep climbing as long as sales growth continues.
A conservative holiday forecast
As we look ahead to the holiday season, we are mindful that the consumer remains cautious, and there are indications of heavy inventory levels at some competitors.
-- CFO Cathy Smith
Target's forecast for the fourth quarter calls for comps growth of between 1% and 2%, which is the same outlook it gave for the third quarter. That would seem to be a disappointing result when compared to last year's 3.8% holiday-fueled, fourth-quarter comps jump.
But management pointed out that last year's bounce was helped by an easy comparison with 2013's holiday season that included the data breach news that sent customer traffic levels plummeting for months. While the company isn't expecting as large of a sales improvement this year, executives do see the business continuing to post slow, steady gains.
Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.
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