Earnings squeezed by expenses, changes in mix

MINNEAPOLIS — Target beat sales expectations in the first quarter, with total revenue that grew 11.3% compared to last year. Earnings fell as consumers spent less on higher margin products like apparel, and the retailer boosted wages and spending on safety measures related to COVID-19.

Target’s total comparable sales grew 10.8% in the first quarter, reflecting comparable digital sales growth of 141%. Total revenue of $19.6 billion grew 11.3% compared with last year, reflecting sales growth of 11.3% and a 7.7% increase in other revenue. Operating income was $468 million in first quarter 2020, down 58.7% from $1,135 million in 2019.

The operating income margin rate in the first quarter was 2.4%, down from with 6.4% in 2019, and gross margin was was 25.1%, versus 29.6% in 2019. This decrease reflected the net impact of actions taken by the company’s merchandising teams, including costs and inventory impairments related to the rapid slowdown in Apparel & Accessories sales, unfavorable category mix as guests stocked up on lower-margin categories like Essentials and Food & Beverage, and higher digital and supply chain costs, driven by unusually strong digital volume as well as investments in wages and benefits.

Target said this week that it is extending its $2-an-hour employee pay increase for another five weeks. The retailer initially offered the extra pay in March to help compensate for heightened health risks from staffing stores and fulfilling online orders amidst the COVID-19 outbreak.

First quarter SG&A expense rate was 20.7% in 2020, compared with 20.8% in 2019. First quarter SG&A results reflected higher compensation costs, including investments in wages and benefits, which were more than offset by the net impact of other factors, including leverage from strong sales growth.

“Throughout the first quarter, our team and guests faced unprecedented challenges arising from the spread of COVID-19,” Target chairman and CEO Brian Cornell said in a statement.  “In the face of those challenges, our team showed extraordinary resilience as guests relied on Target as a trusted resource for their families. With our stores at the center of our strategy, and a significant investment in the safety of our team and guests, our operations had the agility and flexibility needed to meet the changing needs of our business. With the dedication of our team, the benefit of a sustainable business model and a strong balance sheet, we are confident Target will emerge from this crisis an even stronger retailer, with higher affinity and trust from our guests.”