Target sales, traffic leap but profit gets the pinch

A strong economy, remodeled stores, new clothing and furnishing brands — plus the launch of free two-day shipping — helped drive more shoppers to Target this spring.

In fact, the Minneapolis-based retailer logged its biggest jump in traffic growth in more than a decade. Comparable sales rose 3 percent in the first quarter, with gains across most major categories from home and beauty to toys and food and beverages.

"The punch line is every element of our strategy is working and working together," CEO Brian Cornell told reporters, adding that Target is growing its market share across the board.

However, the growth came at a cost as the investments needed to improve sales weighed down profits — which Wall Street focused on as Target stock lost almost 6 percent of its worth Wednesday.

Target has spent on everything from costly remodels to higher employee wages. Even a 28 percent growth in online sales pinched the bottom line because of the higher costs to fulfilling digital orders.

Executives said everything went according to plan in the quarter other than the cold and wet weather in April, which delayed the sales of higher-margin warm-weather items such as outdoor furniture and apparel and contributed to depressed margins. But those sales have since picked up. In fact, the retailer said it expects the traffic and sales to accelerate in the current second quarter.

"Eighty-five percent of Americans shop Target every year," Cornell said. "What we're seeing is that they're shopping us more often."

Seth Sigman, an analyst with Credit Suisse, said expectations were quite high going in, with Target's stock moving up in recent weeks, so the miss on profit was disappointing to some investors. But he said Target's sales numbers show that its initiatives are working, though the company "will need to show that it can effectively balance sales and profits."

Neil Saunders, managing director of GlobalData Retail, said Target's sales growth in the quarter makes it one of the clear winners in retail in the first quarter. The growth, he added, while coming from both digital and stores is coming mostly from the latter.

"In our view, this completely justifies Target's decision to focus on and invest in stores — a step that was criticized by some at the time it was announced," he wrote in a note. "There is no doubt that investing in stores was an expensive decision, but we believe these numbers show it was the right move to make."

Target remodeled 56 stores in the first quarter and started another 113; it expects to refurbish more than 320 stores this year. It plans a similar pace in the next few years.

It has already introduced three new brands this year: Opalhouse, an eclectic home brand; Universal Thread, a denim-focused brand that replaces Mossimo; and an exclusive kids athletic line with Umbro. It plans to launch four more brands in the current quarter, most of which will be geared toward millennials and Generation Z shoppers.

"As other competitors close stores and exit businesses, we will use inventory and marketing to remind consumers we have a compelling assortment in these businesses," said Mark Tritton, Target's chief merchandising officer. "We are also reaching out to our vendors reminding them Target is healthy, we're investing and growing. We're eager to partner with them to launch exclusive items and content."

Encouraging shoppers to buy more items at once online is helping make online sales more profitable, said John Mulligan, Target's chief operating officer. For example, Target's recently launched free two-day shipping offer on online orders over $35 has led to bigger baskets.

Target's same-day delivery service through subsidiary Shipt has rolled out to more than 75 more markets and Target looks to have it up and running from most stores by the end of the year. Orders through it are about double the size of Target's typical online orders, Mulligan said.

In total, more than two-thirds of Target's digital orders in the first quarter were fulfilled from stores, compared with half in the same period a year ago, he said. That helps keep Target's fulfillment costs down since the stores are closer to customers.

Target also raised its minimum wage for store workers to $12 from $11 this spring, on its way to $15 an hour by 2020. Cornell said that move has been paying off, as has increased training for workers dedicated to various departments such as beauty, grocery and apparel.

Kavita Kumar • 612-673-4113