By Juveria Tabassum and Nicholas P. Brown
Aug 19 (Reuters) – Target on Wednesday raised its annual sales forecast as efforts to cut prices and freshen merchandise continued to bear fruit, while noting its quarterly profit received a nearly $1 billion boost from tariff refunds.
It was the third straight strong quarter for Target, which also raised its growth forecast in May. The results suggest the turnaround plan of new CEO Michael Fiddelke is taking root ahead of the all-important holiday shopping season.
“It’s encouraging to see a strong consumer response to change where we’ve made it,” Fiddelke told reporters on a pre-earnings conference call on Tuesday. But he warned: “There’s a lot more to come, and … we need to execute well.”
Target’s shares were down about 3% in premarket trading. The stock has surged 56% this year, outpacing Walmart and the S&P 500 Consumer Staples index.
Comparable sales for the quarter ended August 1 grew 3.8%, beating estimates of 2.5% growth, according to data compiled by LSEG. That included a 3.6% rise in traffic and an 8.7% jump in digital comparable sales, as shoppers opted for same-day delivery.
TARIFF REFUNDS BOOST INCOME
Excluding one-off items and including a tariff benefit of $1.65 per shaer, the company’s quarterly profit rose 20% to $2.46. Analysts had expected earnings per share of $2.33.
“The market is not reacting to a disappointment. The stock had a high bar given the year-to-date run and buy side had high expectations, which the (numbers excluding tariffs) didn’t clear,” said Jacob Aiken-Phillips, analyst at Melius Research.
Excluding benefits from the tariff refunds of about $1.65 per share, Target raised the mid-point of its annual profit per share forecast by 75 cents. In May, it had forecast annual earnings per share near the high end of $7.50 to $8.50.
The retailer now expects year-over-year net sales growth of around 5%, compared with its prior target of growth around 4%.
The company has cut prices on more than 10,000 items over the past year, it said, and about 95% of its school supplies were priced below last year’s rates, to draw in back-to-school shoppers.
When asked how the company would use tariff refunds, Chief Financial Officer Jim Lee said, “We have and will continue to invest in price.” He stopped short of offering specifics about how tariff refund dollars would be deployed.
Fiddelke has focused on keeping shelves well-stocked and adding more products in key categories such as baby care and health and wellness. Building on an effort to draw in young families, the company on Wednesday noted double-digit growth in its hardline business, known as Fun101, naming Legos a leading product.
LITTLE ROOM FOR ERROR
Target said in March it would invest an extra $2 billion — on top of a previously announced $4 billion — to help fix the merchandising problems that had turned shoppers away in past quarters. On an adjusted basis, Target’s second-quarter gross margin rate expanded about 100 basis points to 33.7%.
However, margin comparisons could get harder in the second half, and Target’s forecast implies that margin expansion will slow even as the sales outlook rises, Melius Research’s Aiken-Phillips said.
Fiddelke hinted at more investments in the coming months to maintain growth, including launching beauty studios in more than 600 stores, enhancing its home assortment and advancing its use of technology.
Wednesday’s report was a key barometer as to whether Target can consistently execute on price, product mix and store experience, as it did during the quarter ending May 2, said Morningstar analyst Brett Husslein.
Whereas Walmart’s low prices and high-margin ad business can help it to withstand macro headwinds or managerial missteps, Target’s margins are more dependent on retail sales, and factors that push shoppers away – be they social, macroeconomic or business-driven – can quickly change its fortunes, Husslein said.
That magnifies the importance of execution at a time when consumers are tightening their belts, he said — especially on prices, which must be low enough to compel shoppers without denting margins.
“If they are not on the ball in every way, they risk losing customer wallet share,” Husslein said.
Target also said it had added more space for fresh produce, snacks and bakery products, with snack sales up 15% year-over-year. “Our aspiration is to move our food business from a basket builder and a ‘while-you’re-at-Target’ to (being) the reason why you come to Target,” Chief Merchandising Officer Cara Sylvester said on Tuesday’s call.
Other categories, like apparel and home, were “just barely positive,” Fiddelke said. “We’ve got a lot of work to do in some of the categories where we’re not yet pleased with our performance.”
(Reporting by Juveria Tabassum in Bengaluru and Nicholas P. Brown in New York; Editing by Matthew Lewis)
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