Price cuts and investments boost sales, pinch margins

MINNEAPOLIS — Target Corp. on Wednesday reported that its first quarter store traffic increased 3.7% and its digital sales increased 28% over the comparable prior year figures.

Target said the store traffic increase was its strongest performance in 10 years, and noted that its 28% digital sales gain was on top of a 21% increase in the first quarter of 2017. The company said GAAP earnings per share from continuing operations were $1.33 (up 9.1% from last year) and adjusted earnings per share were $1.32 (up 9.4%).

Operating income was $1,041 million in first quarter, down 9.9% versus the prior year period. The operating income margin rate was 6.2%, down from 7.1% in 2017. And the first quarter gross margin rate was 29.8%, compared with 30.0% in the prior year period. Target said the change reflects pressure from the cost of digital fulfillment and changes to the sales mix, which were partially offset by benefits from the company’s cost saving efforts and the net impact of changes to the company’s pricing and promotions. The company’s first quarter SG&A expense rate was 21.1% in 2018, up from 20.7% in 2017. The increase was driven in part by higher wages for store employees.

“We’re very pleased that our business continued to generate strong traffic and sales growth in the first quarter, as we made significant progress in support of our long-term strategic initiatives,” said Target chairman and CEO Brian Cornell. “Our first quarter performance reflects the benefit of our unique multi-category portfolio. Strong sales growth in our home, essentials and food and beverage categories offset the impact of delayed sales in temperature-sensitive categories, which accelerated rapidly in recent weeks as weather improved across the country. Additionally, our team is delivering excellent execution and guest service every day, and momentum in our traffic has accelerated in the second quarter. As a result, we expect Target’s second quarter comparable sales growth will move into the low to mid single-digit range, and the midpoint of our second quarter EPS guidance represents approximately 15% growth over last year.”

Target said it saw broad market share gains across its core merchandise categories in the first quarter. During the three-month period ended May 5, the retailer said it completed 56 remodels, opened 7 new stores, and introduced three new brands and a limited-time collaboration. During the period Target also launched its new Drive-Up service in more than 250 stores, expanded Target Restock nationwide and rolled out same-day delivery from more than 700 stores, enabled by its recent acquisition of Shipt.