Target Corp. (TGT, Financial) posted better-than-expected first-quarter earnings on May 17. The company’s revenue and same-store sales saw a drop but were not as low as expected, which suggests its turnaround efforts will bear fruit in the future.
There are still some concerns, however. While Amazon (AMZN, Financial) is running a strong online business, Target appears to Ă‚ be behind. Another challenge facing the company is its continuous decline in traffic as its comp sales plunged 1.3%. The company cited fewer online shoppers as the reason for poor comps.
"While we are pleased that our first-quarter financial performance was better than expectations, our results are not where we want them to be and we have much more work to do," CEO Brian Cornell said.Ă‚
A snapshot
Target’s revenue for the first quarter stood at $16 billion, which represents a 1.1% decline from the same quarter the year prior. Adjusted EPS was $1.21, down 6.1% from the prior-year quarter.
First-quarter net income was $681 million, or $1.23 per share, as compared with $632 million, or $1.05 a share, reported a year ago. Sales in the digital channel surged 22%, contributing to same-store sales growth.
Target’s net interest expense for the quarter came in at $144 million, substantially lower than $415 million reported in first-quarter 2016. The abnormal interest cost was on account of an early redemption of $261 million in debt.
Comparison with Wal-Mart
Wal-Mart Stores Inc. (WMT, Financial), the largest U.S. retailer, generated quarterly earnings of $1 a share on total revenue of $117.5 billion. Revenue was up 1.4% from last year. Comp sales improved 1.4% on the back of increases in customer expenditures. Operating income, however, decreased 0.7% to $5.24 billion.
When comparing the first-quarter performance of both Wal-Mart and Target, the former is way ahead. Wal-Mart has expanded its portfolio as far as its online acquisitions are concerned. It now has names like Moose Jaw, Modcloth, Shoebuy, Bonobos andJet.com under its umbrella. Moreover, Wal-Mart is the only retailer that gives Amazon a run for its money in online sales. A combination of these factors makes Wal-Mart superior. Target, on the other hand, has a lot of work to do to catch up.
Looking ahead
Target has been working hard to enhance the customer experience in its stores to attract larger crowds and support growth in the long run. The company plans to introduce 12 original brands in the next two years, a step that could lure customers back. Target has also initiated an advertisement campaign highlighting the benefits of shopping at its stores. The company is trying to fix its traffic problem, but has yet to figure out the right product mix to attract greater footfall.
The retailer had a difficult start to the year, but Cornell was happy to note the “strong execution by [Target's] team as they delivered for our guests in a very choppy environment.” Although the first two months of the quarter were difficult, the company witnessed improvement in March.
Cornell noted the company is in the early stages of a multiyear growth strategy.
"While we are confident in our plans, we are facing multiple headwinds in the current landscape," Cornell said. "As a result, we will continue to plan our business prudently while preparing our team to chase business when we have an opportunity.”
It will be interesting to see how Target manages to cope with the challenges. Until then, stay tuned for the second-quarter numbers.
Disclosure: I do not hold any position in the stock discussed in this article.
Start a free 7-day trial of Premium Membership to GuruFocus.
