Update: Changes pay off early for Target, Q1 profits up 52%
MINNEAPOLIS — Target executives said they are “pleased” with its first quarter, particularly its signature categories, as the company posted a lift in first quarter sales and double-digit gains in its digital channel.
“We’re pleased with our first quarter traffic and sales, particularly in our signature categories, which drove better-than-expected profitability through improved gross margin and continued expense management,” stated Brian Cornell, chairman and CEO of Target. “We’re encouraged to see early progress on our strategic priorities, including strong sales growth in apparel, home and beauty, nearly 40% growth in digital sales, and positive traffic in both our stores and digital channels. We continue to benefit from strong execution by our stores team, who overcame weather challenges and West Coast port delays to deliver outstanding guest service in the first quarter.”
During the first quarter, sales increased 2.8% to $17.1 billion from $16.7 billion last year, reflecting a 2.3% increase in comparable sales combined with sales from new stores. Digital channel sales grew 37.8% and contributed 0.8 percentage points to comparable sales growth.
“We benefited from a very strong mix of sales in our signature categories this year, both in stores and online. First quarter comp sales in signature categories grew more than twice as fast our comparable sales overall and mix in our digital channels was even stronger,” Cornell told analysts during Wednesday morning’s conference call.
During the call, Cornell reiterated the company’s five core priorities —
• Becoming a leader in delivering shopping on-demand for its guests;
• Establishing clear roles in its merchandising categories, which a specific focus on growing its signature categories — style, baby, kids and wellness;
• Developing capabilities to become more localized in its store; experience and more personalized in its digital interaction with guests
• Continue to develop and test urban formats such as CityTarget and Target; and
• Transforming to create capacity to invest in these growth initiatives.
“I strongly believe if we make progress on these five priorities over the next few years Target will deliver outstanding financial results and will become an even stronger retailer,” Cornell told analysts. “While we are in the early stages, I am encouraged by signs of progress on these efforts.”
During the quarter, adjusted earnings per share from continuing operations (adjusted EPS) were $1.10, up 19.6% from 92 cents in 2014. GAAP EPS from continuing operations were $1.01, compared with 89 cents in first quarter 2014.
In providing an update on its Canadian operations, as of April 12, Target Canada completed its inventory liquidation efforts and closed the last of its 133 Canadian retail stores. A court-approved real estate sales process is underway and expected to be complete by the end of June.
Consistent with expectations, after-tax losses from discontinued operations were $16 million in first quarter 2015, compared with $153 million last year. Certain assets and liabilities of Target’s discontinued operations are based on estimates.
Target also noted that incurred breach-related expenses of $3 million in first quarter 2015, compared with $18 million of net pre-tax expense last year. Since fourth quarter 2013, Target has incurred net expense related to the data breach of $166 million, reflecting $256 million of gross expense, partially offset by the recognition of a $90 million insurance receivable.
Looking ahead to the second quarter 2015, Target expects adjusted EPS of $1.04 to $1.14, compared with $1.01 in second quarter 2014. The company now expects full-year 2015 adjusted EPS of $4.50 to $4.65, compared with prior guidance of $4.45 to $4.65.
“These signs of progress are meaningful and demonstrate the value of our efforts and validate our strategic priorities,” Cornell told analysts. “Yet, as we look ahead we realize we are on a much longer journey and need to accomplish many more things. Specifically, we are in the very early stages of our work on localization and personalization. In the future, these efforts should benefit both sales and gross margin rate. And while we are still in the testing phase, we are very encouraged by the progress in evaluating and rolling out urban formats like CityTarget and Target Express. We opened two new Express locations in the San Francisco market this quarter, both of which are quite different from our first location in the Minneapolis market. We expect to open six more locations this year in a variety of markets and demographic areas to continue to learn how to operate this new format in a diverse array of sizes and settings. Finally, we are just beginning to reinvent our food assortment and presentation.”
This post was updated to reflect comments made during the company's conference call.