Target on Wednesday released stronger-than-expected earnings results for the holiday quarter, more evidence that the big-box retailer has begun a turnaround after a challenging year in which it had to rebuild consumers’ trust after a major data breach.
The retailer saw a 3.8 percent increase in sales at stores open more than a year, an uptick that handily beat the 3 percent the company had forecast just two weeks before the end of the quarter. Traffic in its stores was up 3.2 percent, and sales rose to $21.8 billion in the quarter, a 4.1 percent increase over the previous year.
The robust sales increase, the company said, was fueled by better-than-expected sales in its fashion, furniture, baby, kids and wellness categories. Back in September, Target’s new chief executive, Brian Cornell, said that a cornerstone of his comeback strategy was to double down on improving those departments, which had once been distinctive for Target but had lost some of their uniqueness. If these categories are gaining better traction with consumers, it could be a sign that Cornell’s strategy is starting to pay off.
“These are the categories we’re most famous for, and our guests have asked us to lead with them,” Cornell said on a conference call with investors.
Target reported a profit loss, but that was due to expenses related to closing its disastrous Canada business. The retailer had opened stores there two years ago — its first international expansion — only to disappoint Canadian customers with a lackluster product assortment and supply chain problems that frequently resulted in bare shelves. Executives have said that they could not come up with a way to get its Canada business profitable before 2021. So even though the closures are taking a short-term toll on profitability, analysts say the wind-down of that business will likely be good for Target over the long term.
The company’s stock was largely unmoved on Wednesday, trading slightly up, at $77.35 a share, in midafternoon. Despite the strong results from the holiday quarter, the company offered a profit outlook for the current quarter that was below what analysts had expected.
Cornell acknowledged that an improving economy has likely played a role in getting consumers off the wall lately.
“We recognize that consumer confidence has certainly improved [and] lower gas prices certainly helping the industry overall,” Cornell said. “But I also think we made significant strides from a merchandising standpoint and marketing standpoint.”
Target is planning to expand in 2015 on some early tests of new displays and signs. Last year, it began using mannequins in its apparel sections for the first time. Based on customers’ favorable response, its planning to accelerate the rollout of mannequins to more stores in 2015. The retailer is also testing new set-ups for electronics, home and toy departments and plans to expand those tests this year.
In addition to the strength seen in Target stores, the company saw a 36 percent increase in online sales. This was in part fueled by an offer for free shipping on all purchases during the holiday season. Before the Christmas shopping rush, Target had only offered free shipping on purchases over $50.
“If Brian [Cornell] was here, he would let you know it was the best marketing investment he ever made,” chief financial officer John Mulligan said on a conference call with reporters.
The promotion was so successful in driving traffic and conversion rates in its digital shopping channels that Target announced this week that it would lower its free shipping threshold to $25.
Target executives said that the holiday shopping rush began earlier in November for them this year. After some softness in early December, sales again surged as procrastinators scooped up gifts in the final weeks before Christmas. The company was pleased with the results of its “omnichannel” initiatives geared at shoppers who swing between online and in-person shopping. During Black Friday week alone, customers placed 400,000 orders through its buy online, pick up in store offering. Many of those shoppers then bought additional items once they set foot in the store, possibly giving Target an incremental sales boost.
Like its chief rival Wal-Mart, Target has been experimenting with small-format stores that would allow it to get more of a foothold in urban markets.
Target has been testing a new concept it calls Target Express and has opened eight CityTarget stores, which are smaller than its big-box outposts but not quite as small as Target Express. In 2015, more than half of the new stores it opens will be one of these small-format outposts. Target does not break out sales results for these smaller stores, but said they had “very strong” financial results in this quarter.