Target reimagines itself and Wall Street likes what it sees

Updated: 10:45 a.m. | Posted: 8:50 a.m.

Target's first-quarter profits jumped almost 8 percent as attempts to turn its business around appear to be gaining some traction. Comparable-store sales fell for the fourth consecutive quarter, but the decline was nowhere near as bad as expected and online sales surged 22 percent.

"We feel good about the fact that we significantly over-delivered versus expectations in the first quarter," CEO Brian Cornell told reporters during a conference call. "But we have several years of work in front of us and we have to stay very focused on execution each and every day."

While growing online sales and rising profits pushed shares up more than 8 percent before the opening bell Wednesday, Cornell still needs to find a way to thrive in the face of intense pressure Amazon.com and Wal-Mart Stores Inc.

Facing those challenges, Target plans to spend $7 billion over the next three years, more than three times its typical capital expenditure, to remodel more than a third of its 1,800 stores, speed up its expansion of small-format stores, bolster online operations, and launch new brands.

The company will also use stores as local distribution hubs — using the backroom storage areas to also house goods bought online directly to homes, or held there to be picked up by shoppers.

Target is now using about 1,000 stores for direct shipping in a bid to match Amazon's free, two-day delivery available to its Prime customers.

With those measures in place, Target said it expects profits to start growing again in 2019 after taking a hit of $1 billion this year to profit margins.

"Things are better, not totally dire," said Edward Jones retail analyst Brian Yarbrough. "But they have a long ways to go to showing (Wall Street) they are on an improvement plan and show same-store sales positive consistently and grow earnings."

Cornell had said Target wants to return to more consistent low prices on essentials to deepen loyalty among shoppers, a shift from the temporary discounts it had been promoting. That might look like it's stealing a page from Wal-Mart's playbook. But Cornell said Target is focusing on exclusive brands and the experience customers have in stores as well.

All traditional retailers have struggled as Amazon and other online retailers draw shoppers away. Under Cornell, Target had cut costs, revitalized its fashion and home decor sections, tested smaller formats, and expanded online services. But Cornell found those efforts were not paying off.

As Target rebuilds, Wal-Mart is expected to post another quarter of rising customer traffic and increased same-store sales Thursday as its efforts to merge online sales with its vast number of stores click. Back in 2015, Wal-Mart warned that stepped-up investments in stores and in its employees would hurt profits. Those investments appear to be paying. Traffic and sales are booming at stores as a renewed emphasis on low prices has lured shoppers back.

Target is also testing a program called Restock that lets its REDcard customers order household essentials like laundry detergent, paper towels and peanut butter and have them delivered to their homes the next day. The service, being tested with employees for now, is similar to Amazon Pantry.

Target said Wednesday that it earned $681 million or $1.23 per share, for the quarter ended April 29.

Earnings, adjusted for pretax gains and to account for discontinued operations, came to $1.21 per share, well below the 91 cents per share that Wall Street had expected according to FactSet.

Revenue fell 1.1 percent to $16.02 billion, but still beat out analyst projections of $15.62 billion.

Comparable store sales fell 1.3 percent, the fourth consecutive month of declines, but with the company retrenching, it was much better than the 3.7 percent decline that industry analysts had expected.

Shares jumped $4.53 to $59.06, but they're still down more than 24 percent for the year.

MPR News reporter Martin Moylan contributed to this report.