Target’s Shinier Stores Are Bringing Burnished Profits

(Bloomberg Opinion) -- Target Corp. looks increasingly immune to the malaise and aimlessness that has afflicted many of its peers.

The big-box retailer reported Wednesday that comparable sales increased a robust 4.5% from a year earlier in the latest quarter, blowing past analysts’ expectations. The growth reflected a 3.1% increase in traffic from the same period last year, showing that expensive investments in store renovations are luring more shoppers.

Target raised its full-year earnings guidance, a sign it expects the momentum to continue into the holiday season. Shares were poised to open at a record high.

The strong growth is, indeed, an important indicator of Target’s health. At the same time, Target has been delivering upbeat results on this measure for quite a while now; last year was its best annual comparable sales growth in over a decade. So the most eye-catching number in this report is gross margin, which rose to 29.8%, up from 28.7% in the third quarter last year.

In recent years, doubts about the durability of Target’s turnaround often centered on profitability — whether the retailer could stop the erosion of its margins as it generated more sales from e-commerce and moved to have more competitive prices on household essentials. Now there have been two consecutive quarters of year-over-year improvement in gross margins.

All of this suggests that Target’s various strategies are beginning to pay off. The retailer has rolled out many new private brands in its apparel and home goods departments, offerings that typically come with better profit margins. It has focused on figuring out how to use its stores to fulfill online orders, including through options such as in-store or curbside pickup. In those models, customers effectively provide their own last-mile delivery, sparing Target that expense.

Those efforts, along with a revamped promotion strategy, now appear to be offsetting factors that weigh on profitability, including free shipping of online orders. Target also invested recently in its toy and baby categories to capture the business that was up for grabs when Toys R Us and Babies R Us liquidated — a smart move that nevertheless dragged on profitability because toys and baby goods tend to be relatively low-margin items. Target appears to have worked through that shift in its mix of items sold.

Only two years ago, a Target turnaround looked anything but assured. The retailer had made some early improvements under CEO Brian Cornell, who arrived in 2014, but stumbled as it lost step with the competition on prices. Investors were not initially overjoyed about a $7 billion investment plan that included the addition of more small-format stores, more digital capabilities and more private-label brands. Wednesday’s results add to evidence that the changes are getting results. One example: Target said apparel and accessories sales were up “double digits” in the quarter, likely a sign that it took market share from Kohl’s Corp., which saw its shares tank Tuesday on lackluster earnings results that included declining sales in its women’s business.

Wednesday’s results show Target to be well-positioned to ring up strong sales growth this holiday season and beyond. Having found ways to differentiate itself from rivals Walmart Inc. and Amazon.com Inc., Target stands on about as sure a footing as can be found in a fast-changing retail landscape.

To contact the editor responsible for this story: Michael Newman at mnewman43@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.

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