Target Gains After Sales Signal Comeback Bid Is Taking Hold

(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 U.S. retailers.

The stock rose the most in six months 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 Inc. and other large retailers last week. Store closures and retail bankruptcies have left as much as $60 billion in sales up for grabs, Target estimated, but investors are concerned that Target will miss out as it struggles to compete with Wal-Mart Stores Inc.’s low prices and Amazon.com Inc.’s digital prowess.

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 much as 4.5 percent to $56.97 in New York, the biggest intraday gain since November. Target had been down 25 percent this year through Tuesday’s close, hampered by concerns that it was losing ground to rivals.

Though same-store sales fell 1.3 percent in the first quarter, that was better than analysts’ prediction for a 3.6 percent drop. Online sales helped, rising 22 percent and adding 0.8 percentage points to the same-store figure. Earnings amounted to $1.21 a share in the period, which ended April 29, compared with an average analyst estimate of 91 cents.

Revamping Stores

That buys some time for Chief Executive Officer Brian Cornell, who aims to lower prices, refurbish more than 600 locations and introduce a dozen new exclusive brands. He unveiled the first today, Cloud Island, a line of 500 bath, bedding and decorative items for baby nurseries. Efforts to close the price gap with Wal-Mart and others will take time, Chief Financial Officer Cathy Smith said, supported by an ad campaign focused on everyday essential items dubbed “Run and Done.”

While the results beat estimates in a “very choppy environment,” Cornell said, “we are not doing any high fives in the room today.”

The $7 billion plan also includes opening 100 smaller locations in cities and college campuses over three years, part of a bid to grab more higher-income and millennial customers who increasingly shop online.

“The challenges for traditional retailers are likely to only get worse as millennials move into their prime consumption years,” Wolfe Research analyst Scott Mushkin said in a note, adding that Target was “particularly vulnerable” as its key categories like apparel and baby are shifting online.

Some of Target’s mini-stores are delivering comparable-sales gains of more than 10 percent, executives said on a call with analysts Wednesday. Its location in New York’s trendy Tribeca neighborhood will begin testing same-day delivery of in-store purchases next month. The store will serve Manhattan and parts of Brooklyn and Queens.

March Improvement

The first quarter began with very soft sales and then began to pick up -- especially in March, Cornell said. Bright spots were swimwear and an exclusive apparel line from designer Victoria Beckham, which Cornell said was one of its best collaborations ever.

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

Target’s more upbeat outlook contrasted with the disappointing sales from department-store chains last week. Macy’s, the leader of that industry, suffered its worst stock decline since the recession after posting weak results. Kohl’s Corp., J.C. Penney Co., Nordstrom Inc. and Dillard’s Inc. also disappointed investors.

‘Tar-Zhay’ Reputation

Cornell said today that the carnage across the retail industry will free up between $45 billion and $60 billion in sales. But it’s an open question how much of that Target will grab, given that Amazon accounted for more than three-quarters of U.S. retail growth over the holidays, according to Wells Fargo & Co. estimates, while Wal-Mart also gets more aggressive online.

Many Target shareholders soured on the company after its earnings report in February, when it warned that it would cut prices and accept lower profitability. The news sent Target shares tumbling 12 percent, the most in more than eight years.

The concern was that Target would lose its grip on more affluent shoppers, who had helped the company earns its faux French nickname, “Tar-zhay.”

“Their performance in the fourth quarter really spooked them,” said Leon Nicholas, an analyst at Kantar Retail. While the Minneapolis-based company is now showing signs of progress, Nicholas joined Cornell by saying that it’s too early to celebrate.

“Show me a few quarters of results first before we throw a parade,” Nicholas said. “As far as I’m concerned the band should keep their instruments in their cases.”

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