Target Soars Most Since 2008 as Strong Sales Offset Tariff Fears

(Bloomberg) -- Target Corp. surged the most in more than a decade as it equaled Walmart Inc.’s strong start to the year with its own solid first-quarter sales, blunting concerns for now over looming Chinese tariffs.

Comparable sales rose 4.8%, beating analysts’ estimates, fueled by a 4.3% uptick in customer traffic as well as digital growth. The midpoint of the retailer’s second-quarter profit forecast was also above projections.

The performance was “one of the best we’ve seen out of the team from Minneapolis in quite some time,” said Chuck Grom, an analyst at Gordon Haskett Research Advisors. “This is what the bulls have been waiting to see.”

Target bucked the gloom from department-store competitors like Kohl’s Corp., J.C. Penney Co. and Nordstrom Inc., which posted sales declines Tuesday that rattled investors. U.S. retailers enjoyed brisk consumer spending last year, creating an environment that Target Chief Executive Officer Brian Cornell said was perhaps the strongest he’d seen in his career.

The skies have darkened in 2019 -- for some at least -- and that turbulent environment will create distance between the retail haves and the have-nots. On a call with analysts Wednesday, Chief Financial Officer Cathy Smith said that Target’s comparable sales this quarter will be “somewhat slower” than the previous three months as the benefit from the closures of Toys “R” Us stores slows down, but said it’s still grabbing market share from rivals in key categories like toys and baby items.

“Target is establishing itself as a retail survivor,” Simeon Gutman, an analyst at Morgan Stanley, said in a note.

Digital Sales

Target’s shares jumped as much as 10% to $79.19 in New York Wednesday, the biggest intraday gain since December 2008, making it the top performer Wednesday in the benchmark S&P 500 Index.

Web sales rose 42%, faster than the previous quarter’s pace. Target has expanded the ways shoppers can get their online orders fulfilled, from curbside pickup -- now at 1,250 stores -- to same-day home delivery.

The more a retailer sells online, though, the more it crimps profitability. At Target, gross margins in the quarter narrowed slightly year-over-year due to higher fulfillment costs, but the company said it’s seeing strong growth in orders that are either picked up inside its 1,851 stores or at drive-up kiosks in its parking lots. Those methods cost less to process than home deliveries.

“Digital remains the star of the show,” Neil Saunders, an analyst at GlobalData Retail, said in a note.

Still, Target will be pressed to match recent moves by Walmart and Amazon.com Inc. to speed delivery on most orders to one day from two. Target said Wednesday that about 50% of all online orders are already delivered in one day.

Tariff Impact

After a year in which they escaped mostly unharmed from U.S. President Donald Trump’s trade war with China, retailers are now sounding the alarm. Walmart’s finance chief said last week that the company would raise prices on some items because of tariffs, which prompted a call from Treasury Secretary Steven Mnuchin. Home Depot Inc., meanwhile, said Tuesday that product costs could rise by $1 billion a year, while Kohl’s partly blamed tariffs for a cut to its profit outlook.

CEO Cornell said the tariffs could lead to higher prices for consumers and that the company is developing contingency plans to mitigate their impact. Target’s chief merchandising officer Mark Tritton and other executives were in Asia to talk to suppliers last week. Smith, the CFO, said that the recent increase in tariffs from 10% to 25% is already baked into the company’s guidance, but the proposed list of 25% tariffs on about $300 billion of additional Chinese goods isn’t.

The new list of proposed tariffs, released last week, is full of items like clothing, home decor and toys that fill Target’s aisles. Target’s push to develop more exclusive store brands, which continued in the first quarter with lines like Everspring eco-friendly cleaning products, could increase the company’s reliance on Chinese manufacturers, according to Sanford C. Bernstein & Co. analyst Brandon Fletcher.

--With assistance from Connor Corvino.

To contact the reporter on this story: Matthew Boyle in New York at mboyle20@bloomberg.net

To contact the editors responsible for this story: Crayton Harrison at tharrison5@bloomberg.net, Lisa Wolfson, Jonathan Roeder

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