Kohl's (KSS), Lowe's (LOW), JC Penny (JCP), and Nordstrom (JWN) are a few of the more prominent companies to deliver weak quarterly results and/or provide downside guidance.
Consequently, the retail sector has displayed some relative weakness over the past week, illustrated by the SPDR S&P Retail ETF (XRT) sinking by 2.5% since last Friday compared to the S&P 500 trading relatively flat.
However, there have been a couple notably strong reports in the mix, including TJX (TJX) - click here to access yesterday’s report - and Target (TGT) this morning.
TGT generated EPS of $1.53, comfortably beating the $1.43 consensus, with revenue growing 5.0% yr/yr to $17.63 bln, also ahead of the $17.49 bln expectation. Driving its upside performance was a solid 4.8% increase in comparable store sales. This was the company's eighth straight quarter of positive comps, an impressive feat in this environment.
The company also provided inline guidance for Q2 and FY20, seeing EPS of $1.52-$1.72 and $5.75-$6.05 respectively, with low-to-mid single digit growth in comparable sales.
Click here to access TGT's earnings press release.
There are a few key factors that are behind TGT's outperformance.
First, its scale and product diversification allow it to compete more effectively against Amazon (AMZN) than others. The company has the financial resources to build out a distribution and logistics chain that supports same-day pick-up services at its stores.
This has been a major contributor to its success as more than 80% of its Q1 digital volume was handled in its stores. Overall, comparable digital sales jumped by 31% and contributed 2.4 percentage points to its comparable store sales growth.
Another catalyst has been TGT's remodeling efforts which have focused on making its stores cleaner and more modern, while also prioritizing its grocery, electronics, apparel, and cosmetics departments. As part of its $7 bln capital investment plan, the company remodeled 400 stores between 2017 and 2018. This quarter it completed another 53 remodels, putting it on track for about 300 remodels this year.
Last, the company has done a relatively better job managing expenses. It isn't immune to the rising labor and transportation costs that have battered other retailers, but its focus on the higher-margin digital channel and disciplined cost control have offset these pressures.
This is evidenced by its operating margin expanding by 20 bps yr/yr to 6.4%. For a couple points of comparison, LOW's operating margin fell by 45 bps to 7.99% and KSS' dropped to 3.1% from 5.3%.
Looking ahead, one potential hurdle that investors fear could derail TGT's momentum is new tariffs. During the earnings call, TGT acknowledged that it is concerned that tariffs could lead to higher prices for its customers.
It also noted that its recent results demonstrate that its multi-category portfolio is a competitive advantage that has helped insulate the company from the current tariffs. Furthermore, TGT has a plan in place to mitigate the impacts of any additional tariffs.
Key Takeaways: In this environment, retailers must have a competitive advantage that helps them to overcome the many challenges facing them.
TGT, has a couple of competitive advantages that help it stand out. These include its supply chain that enables it to provide same-day shipping to its stores, and its product category diversification which help insulate it against rising costs.
Execution is another piece of the puzzle. TGT's strategy to remodel stores and focus on revitalizing higher-growth departments has paid off, as has its strategy to build out its digital business.
It looks quite grim for many retailers, but TGT is one of the rare exceptions that is still performing very well.