Target tops first-quarter forecasts but warns of Q2 weakness

Discount department store giant Target Corporation reported positive first-quarter sales growth on Wednesday despite a challenging business environment, although it warned of a likely weaker second quarter.

The ‘cheap-chic’ retailer exceeded financial expectations, reporting GAAP and adjusted earnings per share (EPS) of $2.05, and an operating margin rate of 5.2%.

It put the positive results down to a higher gross margin rate compared to the same period last year.

Target said sales were up 0.5%, which it attributed to flat comparable sales, along with the contribution from newly-opened locations.

Inventory levels at the end of the quarter were 16 percent lower than the prior year, primarily driven by a reduction of more than 25% in discretionary categories.

However, inventory investments were made to support rapidly-growing frequency categories and strategic investments to capture long-term market-share opportunities.

Looking ahead, Target said it anticipated a “softening” of sales trends in the second quarter, and so it was preparing for a wide range of sales outcomes centred around a low-single digit decline in comparable sales.

For the quarter, both GAAP and adjusted earnings per share were expected to range between $1.30 and $1.70.

Despite the challenging market conditions, Target maintained its prior guidance for the full year.

The company said it expected comparable sales to vary from a low-single digit decline to a low-single digit increase.

It also projected operating income growth of more than $1bn, and both GAAP and adjusted EPS in the range of $7.75 to $8.75.

“We came into the year clear-eyed about the challenges consumers are facing, and we were determined to build on the trust we've established with our guests,” said chair and chief executive officer Brian Cornell.

“It's required agility and the ability to flex across our multi-category portfolio as we lean into value and the product categories our guests need most right now.

“As we look ahead, we now expect shrink will reduce this year's profitability by more than $500m compared with last year.”

Cornell said that while there were “many potential sources” of inventory shrink, theft and organised retail crime were “increasingly important drivers” of the issue.

“We are making significant investments in strategies to prevent this from happening in our stores and protect our guests and our team.

“We're also focussed on managing the financial impact on our business so we can continue to keep our stores open, knowing they create local jobs and offer convenient access to essentials.”

For the full year, Brian Cornell said Target was maintaining its full-year financial guidance, based on the expected benefit from efficiency and cost-savings efforts and its focus on agility, flexibility and retail fundamentals in the face of continued challenges, including inventory shrink.

“At the same time, we will continue making long-term investments in our stores, supply chain and our team, positioning Target for profitable growth and market-share gains in the years ahead.”

At 0738 EDT (1238 BST) shares in Target Corporation were down 0.26% in pre-market trading on the New York Stock Exchange, at $156.50.

Reporting by Josh White for Sharecast.com.