Target Beats The Street, Shocked Investors Rejoice

In an earnings season for big retailers that has been marked with a lot of gnashing of teeth and rending of garments – Target managed something fairly remarkable with its quarterly number report: some surprisingly good news.

Shares shot up a notable 8 percent in pre-market trading as the Q1 2017 earnings results hit the wires Wednesday – as Target didn’t just beat the street this time around with earnings – they actually beat their own predictions pretty convincingly as well.

“Target’s first quarter financial performance was better than our expectations, reflecting strong execution by our team as they delivered for our guests in a very choppy environment. After starting the quarter with very soft trends, we saw improvement later in the quarter, particularly in March,” said Brian Cornell, Target’s CEO said of the better-than-predicted results.

Target’s CFO Cathy Smith highlighted Target’s general conservatism in its forecasting model, particularly given the fundamental instability in the retail environment at present.

“There were theories for why it might improve,” she said. “We thought it best to plan for why those challenges might not improve.”

So what did the big level up look like?

By The Numbers

The big beat was on earnings per share came which clocked in 20 cents above the high end of Target’s own guidance this time around – EPS was $1.21, the street was looking for 91 cents. Net income clocked in at $681 million, up 7.7 percent  year-over-year.

Revenue in the first quarter was $16.02 billion – that is a year-on -year decline of 1.1 percent, but well above the  15.62 billion Wall Street was expecting. Same store sales were also declining – but once again less than analysts were expecting.
Comparable sales fell only 1.3 percent, as opposed to the steep 3.7 percent that was in the forecast. However blunted fall off seems to have been helped along by the strength in th digital channel. Online, Target’s comparable digital channel sales rose 22 percent for the quarter, which added 0.8 percentage points to overall same-store sales growth. Brick-and-motar stores saw a 2.2 percent drop in same-store sales – a fall off largely attributed to a decline in customer visits and smaller carts when they shop.

Sales in its food and beverage business were also down.

What’s Next

Despite happy investors – the team at Target is not “giving each other high-fives” just yet, according to their CEO.  Target has a long way to go in effecting a turnaround – and one quarter of results that weren’t the full tilt disaster analysts were anticipating does not a complete turnaround make.

“Week to week results have been volatile since Christmas,” Cornell noted during the company’s conference call. “We believe the consumer perceptions of Target have not reflected how low our prices are. This is still the early stage of a multi-year effort.”

That effort, Cornell says, is premised on profitable growth – and it is going to be quite a process.

“While we are confident in our plans, we are facing multiple headwinds in the current landscape. As a result, we will continue to plan our business prudently while preparing our team to chase business when we have an opportunity,” Cornell concluded.

Those business opportunities will include increased focus on grocery and food items (now with Kroger vet Jeff Burt at the helm), an increased push of its own in-store/in=house brands to the forefront of the sales experience, building out of online capacity and (of course) lowering prices.

“Target’s not out of the woods, yet,” Michael Lasser, a retail analyst for UBS, told CNBC Wednesday morning. “The road to improvement will be long.”

Target CFO He also noted that the sunnier-than-forecast first quarter earnings don’t mean Target is the shining star of the retail scene or that company execs are sitting around doing high-fives. “Week to week results have been volatile since Christmas,” he said during the company’s conference call. “We believe the consumer perceptions of Target have not reflected how low our prices are.”

Given this situation, he said, the company is in the “early stage of a multi-year effort” to position itself for long-term profitability and growth.

Among the initiatives that Target hopes will help it reach this long-term growth: it’s testing delivery in its Tribeca store starting in June, and it’s also hoping to improve its food, beverage and grocery offerings. The retailer hired former Kroger KR -1.10% executive Jeff Burt to be its senior vice president, grocery, fresh food and beverage in March.

“While we are confident in our plans, we are facing multiple headwinds in the current landscape. As a result, we will continue to plan our business prudently while preparing our team to chase business when we have an opportunity,” Cornell concluded.