Target Sales Get Lift From Remodels but Spending Squeezes Margins

05/23/18 07:50 AM EDT
By Allison Prang and Khadeeja Safdar 

Target Corp. posted higher quarterly sales as the big-box chain invested in its stores and received a boost from a strong economy. But the spending weighed on profit margins.

The company said comparable sales increased 3% in the quarter ended May 5, compared with a decline of 1.3% in the same period last year. The figures include stores open at least a year and online sales.

Shares of Target, which have gained about 16% since the start of the year, fell 6% in premarket trading as Wall Street was expecting better profit gains.

The company's gross margins fell slightly from a year earlier as spending on store remodels, lower prices and higher wages pressured results.

Chief Executive Brian Cornell said customer traffic to the company's stores was the strongest in years and he expected profit and sales gains to accelerate in the current quarter.

Like other brick-and-mortar chains, Target has been spending heavily to adjust to changes in the retail landscape amid competition from Amazon.com Inc., which has been capturing online sales, and Walmart Inc., which has been fixing up stores and expanding its digital efforts.

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.

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.

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 isn't the only brick-and-mortar chain that has benefited from better economic conditions. Walmart Inc. and Macy's Inc. both reported rising same-store sales for the latest quarter.

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.

Write to Allison Prang at allison.prang@wsj.com and Khadeeja Safdar at khadeeja.safdar@wsj.com

 

(END) Dow Jones Newswires

May 23, 2018 07:50 ET (11:50 GMT)

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