Target surges after sales signal turnaround is taking root

Target's first-quarter sales drop was better than expected, in comparison to a sharp decline in earnings by competitors like Macy's.
Target's first-quarter sales drop was better than expected, in comparison to a sharp decline in earnings by competitors like Macy's.PHOTO: AFP/GETTY IMAGES

WASHINGTON (BLOOMBERG) - Target Corp's turnaround plan gained some much-needed momentum as its latest sales beat estimates, bucking the trend of gloomy results from bellwether US retailers.

The stock jumped as much as 8.6 per cent in early trading after Target's first-quarter sales decline was less severe than analysts projected. Earnings also sailed past Wall Street's most optimistic estimates, helped by a sales uptick in March, and the company gave a brighter outlook for the full year.

The results helped restore some optimism at a business that looked like another brick-and-mortar casualty, especially after bleak sales from Macy's and other large retailers last week. Investors have grown increasingly concerned that Target can't compete with either the scale of Wal-Mart Stores or the e-commerce prowess of Amazon.com.

Against that backdrop, the latest news came as a relief.

"Less bad is the new good," said Joe Feldman, an analyst at Telsey Advisory Group. "Give 'em credit: They beat. But I think it doesn't really change the overall story. They are still planning to make this a transition year."

The stock rose as high as US$59.20 (S$82.6) in early trading after the report was released. Target had been down 25 per cent this year through Tuesday's close, hampered by concerns that it was losing ground to rivals.

Though same-store sales fell 1.3 per cent in the first quarter, that was better than analysts' prediction for a 3.6 per cent drop. Earnings amounted to US$1.21 a share in the period, which ended April 29, compared with an average analyst estimate of 91 cents.

That buys some time for the comeback efforts of chief executive officer Brian Cornell, who aims to lower prices, refurbish more than 600 locations and introduce a dozen new exclusive brands. The US$7 billion plan also includes opening 100 smaller shops in cities and college campuses over three years, part of a bid to better compete with Wal-Mart and Amazon.

"While we are confident in our plans, we are facing multiple headwinds in the current landscape," Mr Cornell said in a statement. "As a result, we will continue to plan our business prudently."

The latest results prompted Target to provide rosier guidance for full-year profit. It now expects earnings above the midpoint of its previous forecast of US$3.80 to US$4.20 a share. Analysts polled by Bloomberg predicted US$4. The company didn't raise its comparable-sales forecast for the year: It still expects a low single-digit decline.

The first-quarter performance was better than the company's own expectations, Mr Cornell said, "reflecting strong execution by our team as they delivered for our guests in a very choppy environment." The period began with very soft sales and then began to pick up - especially in March, he said.