Conclusion:
Not many retailers are proving that they’ve got what it takes to drive sales up and inventory down – in absolute terms. Most of the ones that do are doing it at the expense of margin. Not Target. Like TJX yesterday, Target’s results and outlook exceeded expectations and continue to reflect the premium we’re seeing come deservedly out of the quality players.
We’ve got to admit that six months ago when we got the announcement that TGT suffered its third C-level defection (Doug Scovanner – CFO) that there’s no way we thought we could bank on such consistency. We were wrong. By the time most people read this on Thursday morning, Wal-Mart will have reported numbers. It’s got big shoes to fill.
What Drove the Beat?
With the +5.3% comps known, TGT’s EBIT margin exceeded expectations by 20bps (7.3% vs. 7.1E). Gross margin investments, store remodel and 5% rewards were more than offset by underlying strength in category gross margins and meaningful expense leverage. Target’s +5.3% comp, the strongest reported since 3Q05 was helped by weather combined with an earlier Easter. Though on a relative basis, this helped competitors as well. We think that JCP share gain is a factor. Sales were particularly strong in apparel, high frequency categories including food, healthcare & beauty as well as toys & sporting goods. Inventories at quarter end were down slightly YoY which drove the sales/inventory spread up 7 points sequentially now +6% -- one of the best moves we’ve seen out of any retailer quarter to date. 2Q12 guidance of $1.04-$1.14 is well above consensus of $1.00 with May comps performing in line with expectations to date.
Deltas in Forward Looking Commentary?
In order to properly measure performance relative to original expectations, we look at management’s First quarter results relative to Management guidance as well as any updates to previously provided full year 2012 outlook:
Highlights from the Call
Comp: +5.3% represents the largest comp increase since 3Q05
- Traffic driven by unusually warm weather combined with an earlier Easter
- Guests responded to spring assortment
- Sales particularly strong in Apparel
- High frequency categories including food, healthcare & beauty continue to grow consistently
- Top performers in hardlines were lawn & patio, housewares, toys and sporting goods
Credit:
- Penetration in sales of the credit/debit continues to grow substantially and support the 5% rewards
- Households spending more with the rewards program
- Kansas City pilot market continues to grow penetration by 3 points creating confidence that the program will contribute to future growth
Margins:
- Modest decline in gross margins resulting from remodel program and 5% rewards partially offset by sales mix unrelated to remodels combined with improve category gross margins
- Gross margin investments, store remodel and 5% rewards were more than offset by underlying strength in category gross margins and meaningful expense leverage
- 50bps of opex leverage due to productivity improvements in stores and disciplined expense control.
Real Estate:
- Opened 3 stores (1 store net of closure)
- More than 100 remodels resulting in nearly 1000 general merchandise stores opened or remodeled in the last 4 years
- Pleased with progress of launch in Canada in Spring 2013
- Zellers begins vacating first set of stores In 2Q for TGT to begin renovating- planning 125-135 TGT Canada stores by 2014
Web Platform:
- 1Q sales increased at a lower rate than in store
- Traffic remains strong and conversion/satisfaction continue to improve
- Focused on enhancing the guest experience near term
- Long term planning integration of stores with online and social media to provide a great experience across all channels
Shops/new format:
- Pleased with first flight of shops- currently offering beauty, apparel, pets, home & candy
- Second flight in September offering men's apparel, women's apparel and home
- Planning 1st three City Target stores in July (LA, Chicago, Seattle)
- Curated assortment across categories localized to consumer needs
- 2 additional Target city stores planned for October
Consumer Sentiment:
- Peaked in February and declined in March and April suggesting slower growth near term
- Recent declines in gas prices might lead to stronger household budgets
Guidance:
2Q
- 2Q comp +3% (expected to be relatively consistent across the months)
- May sales have been running essentially on plan consistent with prior guidance of LSD-MSD increase
- Expect US segment EBITDA margins in line with last year and continued most gross margin rate declines generally offset by SG&A leverage
- Expecting Q2 EBITDA margin rate to be flat YoY
- Expect continued declines in Credit asset base though declines should moderate through the year
- EPS of $1.04 to $1.14 and GAAP EPS of $0.94 to $1.04
Full Year
- Full year comp +3%
- Expect credit segment to earn a spread to LIBOR spread of 700bps or more
- Expect Canadian SG&A to continue to build
- raised outlook by $0.05 and expect adjusted EPS of $4.60 to $4.80 and GAAP EPS of $4.10 to $4.30.
Q&A:
Rewards Penetration:
- Around 12% penetration but closer to 15% in Kansas City
- Planning to increase penetration but unsure of overall opportunity
Pricing:
- Pricing has been rational but will heat up as we approach the summer and back to school
Inventories:
- Remains in great shape
- Don’t see flat inventory as a performance obstacle in Q2
Online:
- Investing meaningful resources in omni channel- committed to improvements
- Have seen metrics improve so far in the spring
- Have several releases coming in the Spring and Summer to improve website
Retail SG&A Improvement:
- Significant productivity improvements has driven leverage
- Disciplined expense management across the entire company
Product Mix:
- Apparel has helped the mix 'quite a bit'
- Consumables and commodity categories continue to be strong
- Own apparel brands performing well
- Good results in home
- Currently have 10 own brands doing over $1bn in retail
Gross Margin:
- Negative impact from 5% rewards and P Fresh
- Saw significant improvement in mix
- Expecting similar declines in GM going forward driven by 5% rewards and P Fresh
- Apparel mix helps the bottom line
- Owned brands also accretive to the bottom line
Traffic Uptick:
- Weather drove traffic delivering great value, a great experience, good merchandising content
Capex:
- $3.3bn total this year
- 2.5bn in the US, $800mm in Canada
- Expect US to be between 2.5-3bn next year with Canada peaking near $1bn
- $10mm-$11mm per store
Customer Sentiment:
- Sentiment peaked in February but the decline in March and April partially due to gas prices
- Tied to gas, unemployment, etc.
Weather Pull Forward
- Reaching more normalized timeframe now
- Difficult to tell how much was pulled forward
- Weather related factors in the rear view
Canada:
- Many customers already familiar with the brand
- Looking for a full blown TGT experience
- Believe there is a white space opportunity in apparel and home
- All of the Canadian competitors are anticipating the Target arrival
- Hope for a successful launch wowing the consumer with content, value proposition, service
