giant Target (TGT 71.19, -4.28, -5.67%) is trading lower today after reporting Q1 (Apr)
earnings/guidance this morning. Non-GAAP EPS came in at $1.32, which was up 10%
from a year ago, was in-line with prior guidance of $1.25-1.45. However, that
$1.32 result was below market expectations. Revenue rose 3.4% year/year to
$16.78 bln, which was above market expectations. In terms of guidance, TGT
expects Q2 (Jul) non-GAAP EPS to come in around $1.30-1.50, the mid-point of
which is above market expectations. For the full year, TGT reaffirmed its
non-GAAP EPS guidance of $5.15-5.45.
Turning to the key metrics, AprQ same store comps increased +3.0%, in-line with prior guidance of low single digits. Comps were helped by Valentine's Day and the baby business has been strong. TGT saw strong apparel and hardlines but they were below the company average. Hardlines were impacted by liquidation efforts by competitors. The company saw broad market share gains across its core merchandise categories. Strong sales growth in its home, essentials, and food & beverage categories offset the impact of delayed sales in temperature-sensitive categories, which accelerated rapidly in recent weeks as weather improved across the country.
What's really notable is that customer traffic grew 3.7% in AprQ, which was Target's strongest traffic improvement in more than 10 years. Looking ahead, Target expects comps to increase in JulQ to low to mid-single digits. TGT said it was impacted in April by cold weather which hurt temperature-sensitive categories. However, sales in May have benefited from a surge in warm weather categories. TGT is on track with prior guidance for full year comps.
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 re-imagine hundreds of existing stores.
In Q1 (Apr), TGT completed 56 remodels, opened 7 new stores, introduced 3 new brands and a successful limited-time collaboration with Hunter, launched its new Drive-Up service in more than 250 stores. TGT also expanded Target Restock nationwide and rolled out same-day delivery from more than 700 stores, enabled by its recent acquisition of Shipt. In JulQ, another 100 remodels will be completed.
On the call, management talked about how more than 2/3 of digital volume in Q1 was fulfilled by stores. Most of this is shipped from stores directly to consumers. Drive-up is a new service that Target is expanding aggressively while also boosting same-day sales through Shipt and planning to increase this in urban areas. Target is getting positive feedback on this service and guests tend to build much bigger baskets with these orders.
Target is seeing incremental lifts of +2-4%, due to increased customer traffic. As part of the remodels, Target is offering better service and better trained employees on various products.
In sum, time will tell if Target's transformation will allow it to better compete in the changing retail environment. It's too early to tell at this point as the plans will take 2-3 years to be completed. In the meantime, the remodels seem to be a big reason why customer traffic has been rebounding. Overall, investors are not happy with the quarter but there are some positive things going on. As the company goes through changes some bumpy quarters are bound to happen.
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