Flashy sales events are fine, but Target improves from many small moves

Don't give Lilly Pulitzer the credit for Target Corp.'s surprisingly strong first quarter.

Though the Minneapolis retailer created headlines, and some headaches, in last month's blast sale with the designer, executives said a number of lower-profile initiatives helped it through the shopping lull of late winter and early spring.

Its results Wednesday outshone those of Wal-Mart and several other retailers.

In the February-to-May quarter, Target reported a 52 percent increase in profit, to $635 million. Revenue was up 3 percent to $17 billion and same-store sales were up 2.3 percent.

Target had an easy comparison on its side. A year ago, it was grappling with losses in its Canadian stores and the lingering effect on its reputation from the data breach that happened at the end of 2013.

But even excluding the Canadian operations that Target has since shut down, profits were up 14 percent.

"The momentum we've seen so far makes us more confident than ever that we're moving in the right direction and encourages us to move even faster," Chief Executive Brian Cornell told analysts and investors in a conference call.

As he and other executives described the details, they made clear that little steps were paying off.

Remember those mannequins Target has been rolling out? They are now in 1,000 stores and are helping to clinch sales, executives said. Its new plus-size line, Ava & Viv, resonated with customers. Swimwear and beauty products were two other top performers. And even one of its longtime private-label fashion brands, Merona, had a good showing.

These are the cheap-chic sort of offerings for which Target has always been known, but which had not been as distinctive in recent years. So Cornell has been placing more emphasis on four groups he calls "signature categories" for the company: style, kids, baby and wellness. Target said sales in those categories grew more than twice as fast as overall sales in the first quarter.

"These are the categories that can differentiate them from the Wal-Marts and Amazons of the world," said Brian Yarbrough, an analyst with Edward Jones. The strong first-quarter results in these categories "says to me that this management team's strategy is working. It's early, but they are seeing very good signs."

Cornell said he was "thrilled" with the response to Target's partnership with Lilly Pulitzer, a Palm Beach-inspired resortwear brand. But executives said it was too small to have a significant impact on its overall quarterly sales. The collection, which debuted in April, grabbed headlines once it quickly sold out of stores on its first day.

Cornell said the event also exposed a weakness in Target's website, which nearly crashed from heavy traffic.

"Our digital channels were not able to properly accommodate the surge in traffic at the time of the launch," he said. "The team is working to address root causes and to learn from the experience as we prepare for holiday season peak later in the year."

Online sales grew 38 percent in the quarter, helped by Target's decision to lower its free shipping threshold from $50 to $25 in February. They still account for less than 3 percent of overall sales.

The retailer's improved product lineup also helped draw more consumers to the stores, leading to a second consecutive quarter of growth in store traffic.

"They're in the early stages of what I see as a long-term turnaround," said Joshua Hill, senior portfolio manager for Minneapolis-based Windsor Financial Group, which is a Target shareholder. "I think Brian and the team are certainly making progress."

Target resumed share buybacks for the first time in nearly two years, purchasing $562 million worth in the quarter.

Cornell acknowledged that Target is still going through an "adjustment process" after laying off 1,800 corporate employees at its Minneapolis headquarters in the past two months. But he said he is convinced it was the right decision.

"While these reductions were very difficult for all of us, I strongly believe they were a necessary step to remove roadblocks which were preventing us from moving more quickly and responsibly to the guest needs," he said.

When asked on a conference call with reporters how many more jobs Target plans to shed, Chief Financial Officer John Mulligan said simply that the company will continue to evaluate its business.

Adjusted for restructuring costs and other one-time items, Target's profit amounted to $1.10 a share, better than the $1.03 that was the consensus of analysts' forecasts. That's up 19 percent from a year ago.

The results contrasted with smaller gains at Macy's, Gap and Kohl's.

Rival Wal-Mart logged disappointing results on Tuesday with same-store sales in the U.S. rising just 1.1 percent.

Target slightly increased its outlook for the rest of the year and forecast a second-quarter same-store sales increase of between 2 and 2.5 percent.

Target's shares rose 26 cents, or 0.3 percent, to close Wednesday at $78.18.

Kavita Kumar • 612-673-4113