What Does Target Corp's Q1 Results Say about Its Turnaround Plan?

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May 21, 2015
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Target Corp. (TGT, Financial) released its first quarter earnings results on Wednesday, reporting a surge of almost 52% surge in its profit on the back of solid sales of more profitable items such as fashion and baby products. The company’s turnaround efforts, to amend for a series of costly missteps, seem to be paying off. The quarter numbers conveniently crushed Wall Street estimates on all fronts.

After recording such a strong start to the fiscal year, the Minneapolis-based retailer lifted its annual profit outlook. Target latest earnings release suggests that the retailer might finally resume to a more solid footing. Here’s the key takeaway from the quarter.

Quarter numbers

Strong sales of its signature products such as the Lilly Pulitzer clothing, health and wellness, baby products, and other selected items helped Target report strong quarterly profit that surpassed expectations. The company saw earnings of $1.10 per share. That compares with $0.92 a share in the year-ago quarter. Target’s top line increased to $17.1 billion, against last year’s $16.7 billion in the U.S. Analysts had expected a profit of $1.03 per share and revenue of $17.08 billion.

The company feels that the earnings figure is a sign of recovery for the company after a period of chaos and disorder that included a massive data breach in 2013 and an abortive expansion in Canada. Target has also struggled in the grocery division, where discount food biggies such as Walmart gave it a tough run for its money.

The company told reporters that it was successful to pull out on discounts in comparison with last year, which resulted in better profit margins. For the current fiscal year, Target lifted its forecast saying that it expects earnings per share to come in the range of $4.50 to $4.65. Earlier the company had given an earnings outlook of $4.45 to $4.65 per share. This compares with analysts expectation of $4.56 per share for the year.

Face to face with other retailers

Other retailers including Kohl’s (KSS, Financial), Macy’s (M, Financial) and Wal-Mart’s (WMT, Financial) quarter numbers weren’t as rosy. Lower gas prices were expected to boost consumer spending beginning this year, however that didn’t spur much demand. The reason being, consumers were seen to use the saving for debt repayment. Retailers, as a result, didn’t gain as per expectations. In fact, the largest American retailer Wal-Mart, which released its earnings a day before Target, missed Street estimate.

Wal-Mart showed a 7% plunge in first quarter profit. This was primarily dragged down by its increased expenditure to expand online operations and its latest move of hiking wages for hourly workers.

Turnaround strategy

Both Target and Wal-Mart have seen a prolonged period of sluggish sales and poor customer traffic. The two are presently dedicated to turnaround their businesses. Retailers are faced with the challenge of luring customers who have converted to online shoppers or are more comfortable with buying at smaller stores.

Target aims to reposition as a more inventive retailer. The company is working on recouping its status as a cheap chic retailer under the new CEO Brian Cornell who took his office last August.

After Cornell got appointed as the CEO, Target pulled the plug on its unprofitable Canada expansion starting this year. The aim is to concentrate on the company’s US business. Target began economizing its operations in the country which included reducing 1,700 positions. The company is putting in great effort in the areas of home furnishings, fashion, and children's products. Besides, it's revamping the grocery aisle with increased focus on organic, naturally raised, and locally produced products. As Cornell says: "The momentum we've seen so far makes us more confident than ever that we're moving in the right direction and encourages us to move even faster." Let’s stay tuned to see what the next quarter numbers say about the turnaround progression.