Retail giant Target (TGT) is trading higher today after reporting Q2 (Jul) earnings/guidance this morning. Non-GAAP EPS came in at $1.23, which was flat with what the company reported last year and was above market expectations. Revenue rose 1.6% year/year to $16.43 bln, which also was above market expectations. On July 13, TGT announced that it expected non-GAAP EPS above $1.15, so the strong EPS number is not a total surprise, but it came in handily above that $1.15 hurdle.
In terms of guidance, TGT expects Q3 (Oct) non-GAAP EPS to come in around $0.75-0.95, the mid-point of which is above market expectations. For the full year, TGT increased its non-GAAP EPS guidance to $4.34-4.54 from prior guidance of $3.80-4.20. Turning to the key metrics, JulQ same store comps increased +1.3%, in-line with the July 13 guidance of a "modest increase." Comps were driven by traffic growth of +2.1%. The +1.3% comps was exactly the same as the +1.3% comp in Q1 (Apr). Comp digital channel sales increased 32%, on top of 16% in the prior year period.
Target has been transforming itself to better compete with online rivals. A big part of this was an announcement in March 2017 when the company unveiled design elements for its most ambitious store re-design to date. The company plans to invest billions of dollars over the next three years to reimagine hundreds of existing stores. Target wants to take its shopping experience to the next level by offering more elevated product presentations and a number of time-saving features. About 500 reimagined stores are planned for 2018 and 2019.
In October, Target will open its first fully reimagined store 35 miles southwest of Houston. The new 124,000 sq-ft store will offer guests the newest shopping experience as Target evolves its stores. In addition to the Houston location, 40 additional stores will receive elements of Target's next generation re-design when they are updated in October 2017. Guest feedback will influence Target's approach to the 500 stores being reimagined in 2018 and 2019.
The modernized design features will include glazed, large glass windows at the front of store, stenciled concrete floors and unique lighting throughout. Additionally, the new design offers two entrances. Guests can enter through one entrance to find displays of exclusive brands and inspiring seasonal moments, and the other for easy pick-up of online orders and groceries. Also, cross-merchandise product presentations will amplify Target's exclusive style assortment across apparel and accessories, home, jewelry and beauty, encouraging guests to browse.
For time-starved guests, the second entrance will offer easy access to grocery, a Wine & Beer shop, self-checkout lanes and a dedicated Order Pickup counter. Outside this entrance, guests will find dedicated parking spaces where team members will bring out online orders. In addition, employees will be equipped with new technology -- available in all stores this fall -- to search inventory, take payment from a mobile point-of-sale system and arrange delivery, all from the sales floor. This announcement followed Target's previously shared plans to open more than 100 small-format stores over the next three years for dense urban neighborhoods and college campuses.
In sum, time will tell if Target's transformation will allow it to better compete in a changing retail environment as more shoppers shop online. It's too early to tell at this point as the process will take 2-3 years. But in the meantime, the JulQ results were actually quite good and the OctQ guidance was quite optimistic as well.