TGT Target Corp

By Sarah Nassauer and Khadeeja Safdar 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (May 24, 2018).

Target Corp. said sales are rising as the big-box chain benefits from a strong economy and recent investments in stores and online, but those investments continue to weigh on profits.

The company on Wednesday said sales in existing stores rose 3% in the quarter ended May 5, boosted by more shoppers visiting Target's stores and website. Chief Executive Brian Cornell said customer traffic to stores was the strongest in over a decade of quarterly figures.

But profit margins fell from a year earlier as the retailer spent on store remodels, lower prices and higher wages. Meanwhile, cooler weather in early April delayed spending on some higher-margin seasonal purchases, executives said.

Target expects margins to improve throughout the year as some of those investments lessen and the retailer focuses on cost cutting, said Cathy Smith, Target's chief financial officer.

"The consumer is very healthy and they are spending more time shopping at Target," Mr. Cornell said. Target is gaining market share across all product categories, he said.

Shares of Target, which are up about 10% since the start of the year, fell 5% in morning trade as Wall Street was expecting better profit gains.

Like other brick-and-mortar chains, Target has been spending heavily to adjust to changes in the retail landscape. It faces competition from both Amazon.com Inc. online, as well as the country's largest retailer, Walmart Inc., which has been fixing up stores and expanding its digital efforts.

A strong economy and investments to improve stores and grow online are propelling some retailers forward. Earlier this month Walmart and Macy's Inc. both reported rising same-store sales for the latest quarter.

But many traditional retail chains continue to struggle. J.C. Penney reported weak quarterly sales last week. On Tuesday, the company said CEO Marvin Ellison would leave to become CEO of Lowe's Co, another retailer trying to improve sales results. Lowe's reported sales in existing stores rose 0.6% on Wednesday, blaming cooler spring weather.

Target has invested heavily to grow its business. Since the start of last year, Mr. Cornell embarked on a multibillion-dollar spending plan. He lowered prices and invested in its private-label brands, store renovations and opening stores in urban areas. Last year, the company bought grocery delivery startup Shipt for $550 million to build up its same-day delivery capability.

Store sales contributed more to quarterly sales growth than e-commerce did, which "completely justifies Target's decision to focus on and invest in stores," said Neil Saunders, managing director of GlobalData Retail. However, lower profit margins will remain in focus, Mr. Saunders said. "Continued effort is needed to drive top-line growth," he said.

Target's first quarter profit rose 5.9% to $718 million, or $1.33 a share, compared with $678 million, or $1.22 a share for the same quarter a year ago. Total sales climbed 3.5% to $16.56 billion.

Online sales grew 28% in the quarter, up from 21% the previous year.

Mr. Cornell said the company's grocery and homegoods segments had strong growth in the latest quarter, helping to balance out categories that were "temperature-sensitive."

The company expects second quarter same-store sales to rise in the low- to mid-single digits from a year ago. The company maintained its financial goals for the full year.

Target is remodeling more stores this year, adding locations in urban areas and expanding delivery and pickup options. It is also testing out a new distribution strategy that would help with stocking smaller stores. In the company's first quarter, it finished remodeling 56 locations.

Allison Prang contributed to this article.

Write to Sarah Nassauer at sarah.nassauer@wsj.com and Khadeeja Safdar at khadeeja.safdar@wsj.com

(END) Dow Jones Newswires

May 24, 2018 02:47 ET (06:47 GMT)

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