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Target raises FY guidance amid "encouraging" Q2

US retail giant Target has raised its full year guidance after booking what it called "encouraging" second-quarter results as sales crept up and its work to improve the business starts to pay dividends, thanks in part to what one analyst says is the retailer's exclusive new brands – including Cat & Jack – and the overhaul of its stores.

For the three months ended 29 July, the Minneapolis-based company said net earnings slipped 1.2% to US$672m from $680m in the year-ago period. Gross margin narrowed slightly to 30.5%, compared with 30.9% last year, reflecting increased digital fulfilment costs and the retailer's efforts to improve pricing and promotions.

Second quarter sales meanwhile, increased 1.6% to $16.4bn from $16.2bn last year, reflecting a 1.3% comparable sales increase combined with the benefit from sales in non-mature stores. Comparable digital channel sales grew 32% and contributed 1.1%.

For the full year, Target expects its comparable sales growth will be in a range around flat, plus or minus 1%, and adjusted EPS of $4.34 to $4.54, compared with prior guidance of $3.80 to $4.20.

CEO Brian Cornell said he was particularly pleased that second-quarter traffic increased more than 2%, reflecting growth in both the retailer's store and digital channels.

"We continue to focus on our long-term strategy, as we work to transform every part of our business and build an even better Target that will thrive in this new era in retail," he added. "While our recent results are encouraging, we will continue to plan prudently as we invest in building our brands, our digital channel, the value we provide our guests and elevating service levels in our stores."

Earlier this year, Target revealed plans for a new financial model, promising an overhaul of stores, digital channels and supply chain, alongside the introduction of more than a dozen new brands.

For Neil Saunders, managing director of GlobalData Retail, the comparable uplift in particular suggests that some of company's initiatives are starting to pay off.

"That both online and stores drove the 1.3% rise in comparables is particularly encouraging," he adds. "Admittedly, most of the uplift (1.1% points) came from digital where sales grew by a stellar 32% over the prior year. Nevertheless, a 0.2% upswing in same-store numbers is an achievement of sorts, if only because Target has long struggled to improve the productivity of its stores."

For Saunders, the retailer's improvements to ranges and to its stores are two factors behind the uptick. Exclusive new brands like Cat & Jack, which was launched in July of last year and expected to generate more than $1bn in sales in its first fiscal year alone, are helping to differentiate Target from rivals.

Meanwhile, while Saunders concedes the "refreshed stores are a little underwhelming and could have been more imaginative," he notes there is "no denying that they are a marked improvement on the gloomy and dated fit-out that they replaced," helping to attract more customers and improve conversion rates among visitors. He adds the ongoing remodelling, which will see 100 stores upgraded this year and 300 more next year, will be "beneficial" to comparable sales.

In addition, the retailer's smaller stores are proving successful in their own right, making a small, but growing contribution to healthier numbers.

However, Saunders notes the downside to Target's results is the deterioration in net income as capital investments, higher fulfilment costs from digital, and reduced margins from price investments all took their toll. "Looking ahead we see more pressure, particularly as Target ramps up its activity in unprofitable areas like collection and delivery.

"We do not criticise the bottom line squeeze; indeed, we believe it is entirely necessary for Target to invest and evolve. Longer term, however, the acid test will be whether to acquire Grand Junction, a transportation software startup, in a move designed to help the US department store retailer make faster and more efficient deliveries and boost ongoing efforts to transform its supply chain.arget's investments result in a sustained and significant upswing in sales. The early signs are good, but there is a lot more work to be done."

Earlier this week Target announced plans to acquire Grand Junction, a transportation software startup, in a move designed to help the US department store retailer make faster and more efficient deliveries and boost ongoing efforts to transform its supply chain.