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Target’s Same-Store Sales Growth Drove Beat on Profits, Despite Rise in Supply Chain Costs

Investments in its operating and business model, plus a focus on same-day options and new exclusive brands, have helped drive traffic growth and comparable sales gains for Target Corp in the first quarter.

In a Nutshell: The mass discounter brought the “Tarjay” back to Target, as evidenced by a substantial 29-cent beat on Wall Street’s estimates for adjusted earnings per share. The company posted $1.72 on an adjusted basis, versus the Street’s consensus of $1.43.

According to Target chairman and chief executive officer Brian Cornell, “Over the last two years we have made important investments to build a durable operating and financial model that drives consumer relevance and sustainable growth. Target’s first quarter performance and market-share gains demonstrate that the model is working.”

Net Sales: Total revenues for the quarter ended May 4 rose 5 percent to $17.63 billion, up from $16.78 billion. Included in total revenues was a 5.1 percent increase in sales to $17.40 billion from $16.56 billion.

The company said comparable sales rose 4.8 percent overall, while comparable digital channel sales grew a sizable 42 percent.

Target’s gross margin rate dipped slightly due to higher digital fulfillment and supply chain costs that were partially offset by the benefit of merchandising strategies. In addition, the company said its selling, general and administrative expense rate was 20.8 percent in 2019, versus 21.1 percent in 2018. The decrease reflected cost savings in technology and a year-over-year timing benefit in marketing expenses and, combined with strong expense control, helped to offset continue pressure from wage growth.

Earnings: Target posted a 10.8 percent increase in profits to $795 million, or $1.53 a diluted share, from $718 million, or $1.33, a year ago.

Wall Street was expecting adjusted diluted EPS of $1.43 on revenues of $17.5 billion.

For the second quarter, Target guided comparable sales growth in the low- to mid-single digit range, and adjusted EPS of $1.52 to $1.72. For the year, the discounter also guided its comparable sales in the low- to mid-single digit and adjusted EPS of $5.75 to $6.05.

Investors like the quarterly report, sending shares of Target up nearly 9 percent to the $78.11 range in mid-morning trading Wednesday.

CEO’s Take: Cornell said, “Throughout this year, we will continue to extend the reach of our same-day fulfillment options, strengthen our portfolio of owned and exclusive brands, remodel and open more stores and invest in our team. We’re confident that we’re well-positioned to deliver strong financial performance in 2019 and beyond.”