Target raised its annual sales growth forecast for the first time in two years, but cautioned a tough macro environment ahead, as the retailer tries to turn itself around after an extended sales slump.
New CEO Michael Fiddelke, in his first earnings call since taking the top job from Brian Cornell in February, was pleased with the company's 5.6% sales growth this quarter, but said "we will not confuse this progress with potential." Target's shares initially rose before reversing course, and were down about 6% in early trading on Wednesday.
The $59-billion retailer has muddled through three straight years of declining revenue as cost-conscious shoppers moved to cheaper options. Its merchandise also failed to attract higher-income consumers looking for nice-to-have apparel and home decor.
Target now expects net sales to grow around 4% this fiscal year, double its prior target of 2% growth. "Expectations were high, but Target checked every box," said Chuck Grom, analyst at Gordon Haskett Equity Research.
Still, Fiddelke cited "recent dips in consumer sentiment," and said he was "not wanting to swing too hard too quickly." His plan to draw back shoppers included spending an extra $2 billion this year to ensure well-stocked merchandise, and cutting prices on 3,000 items in response to the fuel shock. It shows early promise, with same-store sales growth far exceeding expectations of a 2.5% rise, ending four quarters of decline, according to data compiled by LSEG.
"We laid out a really ambitious plan for this year, and it'll be the first of a series of years of ambitious plans, would be my guess," Fiddelke said on Wednesday's earnings call. Target shares have jumped about 30% so far this year. Consumer-facing companies have been conservative about their full-year goals as the Iran war increases costs of fuel and impacts company profits.
"Q1 results delivered on a high bar, but revised guidance implies a slowdown throughout the remainder of the year," said Steven Shemesh, analyst at RBC Capital Markets.
WHAT'S WORKING FOR TARGET
Perfect execution was crucial if Target wants to overcome Walmart's price advantage and gain back market share, analysts have said.
"Target sits in a middle ground of retail - not the cheapest, not the go-to place for any one thing," said Morningstar analyst Brett Husslein.
For the three months through May 2, Target posted a rise in sales in all six of its core merchandising categories, compared with declines in five categories a year ago.
Sales grew in the double-digits for toys where the company priced more products south of $10, executives said, while net sales jumped 6% in the food and beverages category, where it added 3,000 new food items.
Target also benefited from its newly introduced baby boutique segment offering more premium brands in about 200 stores and which comes ahead of its planned Target beauty studio launch in nearly 600 stores this fall season.
It expects adjusted earnings per share at the upper end of its target range of $7.50 to $8.50.
SAME-DAY DELIVERIES DRIVE DIGITAL ORDERS
Lower prices and fresher products on the shelves helped Target better compete with the aggressive pricing strategies from Walmart and Amazon, as well as off-price retailers like TJX and Ross Stores, while store remodels helped stock inventory better and fulfill online orders.
Digital sales surged 8.9%, Target said, well above the 1.9% growth in the prior three months. A 27% jump in same-day deliveries under Target's Circle 360 membership program also helped, as households sought convenience and the option to save fuel. Target's first-quarter gross margin rate was up slightly at 29%, helped by savings from its supply-chain efforts, growth in Roundel advertising revenue and lower markdowns.
Adjusted earnings per share of $1.71 beat estimates of $1.46.
Retail bellwether Walmart will report quarterly results on Thursday.
