Target sees a reversal in comps
On July 13, 2017, Target (TGT) shares rose ~5% after the company raised its fiscal 2Q17 comps outlook. It projects that its bottom line to be at the higher end of its earlier guidance range of $0.95–$1.15. Target expects its comps to show a modest improvement in fiscal 2Q17. The company is witnessing higher store traffic as well as growth in category sales.
Target’s reversal was a surprise. The company has been struggling on the comps front (a key metric for retailers) due to its unfavorable product mix and higher competition. The above graph shows that Target reported lower comps in four consecutive quarters due to weak store traffic.
In our previous series on Target, we discussed that the company’s biggest challenge is its offerings. Excluding its signature categories, other products aren’t drawing consumers to its stores. Meanwhile, the grocery segment remains challenged due to increased competition. However, if Target manages to change that trend, it could help the company return to the growth trajectory.
Is it too early to make a call?
As we stated above, the company’s upbeat outlook should bring some respite to shareholders. However, it’s premature to make a call on Target stock. The company has a big task ahead. Walmart (WMT) and Amazon (AMZN) upped their game, which could restrict the company’s upside potential. Also, Aldi’s expansion and Lidl’s arrival aren’t a good sign.
Target has taken numerous measures to accelerate its top-line growth, which includes opening small-format stores, remodeling existing stores, expanding its digital business, and adding new brands to its signature categories. The company’s new next-day delivery service is still a significant move. It could drive sales higher as it remains popular among consumers.
During Target’s fiscal 1Q17 conference call, management noted that its small-format stores are very productive. Mature stores are generating double-digit comp growth. These stores continue to be one of the primary reasons behind the company’s better-than-expected first quarter results. Meanwhile, the company’s online platform is generating higher sales.
Whether Target returns to a growth path remains to be seen. The harsh retail environment, consumers’ changing preferences, and increased competition will likely take a toll on Target’s financials.