Target Earnings: TGT Shares Jump On Strong Sales Results

Target on Wednesday reported another stellar financial quarter, once again winning market share from its frequent victims: department stores.

The discount retailer said that comparable sales rose 4.5% in the third quarter ended November 2, a full percentage point above what Wall Street expected, according to Consensus Metrix. Most encouragingly, Target’s online business boomed while the chain attracted more visitors to its stores.

The company raised its annual profit forecast for the second time this year, and its shares jumped 13% in morning trading to an all-time high.

One of the biggest factors behind Target’s blowout quarter was apparel. While Kohl’s, which like Target is primarily an off-mall retailer, earlier this week blamed warm weather in September for delaying the purchase of cold weather clothing and said discounting had been unexpectedly aggressive, Target saw apparel sales jump 10% even as it contended with the same weather patterns.

That has a lot to do with how Target has so deftly and quickly reinvented its store brands in the last few years, launching new popular brands such as the $2 billion Cat & Jack line for kids, Goodfellow & Co for men, and Universal Thread for women. Meanwhile, Kohl’s continues to struggle with reinventing store labels like Sonoma, as does J.C. Penney with its brands. Target’s success has extended to home goods too.

“At the heart of Target’s success is its assortment: the company has put together ranges across all its departments which are desirable and affordable,” GlobalData Retail managing director Neil Saunders wrote in a research note.

Target is in the midst of a multi-year $7 billion program to improve its stores and digital firepower that has included remodeling several hundred of its 1,800 stores every year, making them more inviting while updating them for the e-commerce era.

One aspect of its efforts has been to hire so-called “visual merchandisers,” traditionally an important role at department stores that had professionals figure out how to optimally present items in stores, particularly on mannequins, and what products look best next to what products.

The result has been a stylish presentation of products that mixes and matches items to suggest a whole look, a high-touch approach not typically associated with discount stores. Last week, J.C. Penney, whose comparable sales fell 9.3% last quarter, touted its return to the use of visual merchandisers after cutting that role in recent years to save money. Now Penney is bringing them back at some locations to make its stores more pleasing and less like the bazaars some of them resemble.

Another recent move that has helped Target, as detailed in a Fortune magazine deep dive this summer into its turnaround: allowing store workers to specialize in a product category so they develop deeper knowledge about the things Target sells, replacing Target’s old practice of having them be “general athletes” as Target CEO Brian Cornell puts it.

The result is better products presented in a more pleasing environment and with informed staff around, something the mid-tier department stores have struggled with.

“What Target has become is the modern department store,” Saunders told Fortune recently. There is a retail irony there: Target was launched in 1962 as a discount offshoot of Minneapolis department store chain Dayton’s.

This extends beyond Target’s brands to the national names other retailers also carry. One recent proof point: jeans maker Levi Strauss & Co recently started selling its core line “Red Tab” label at 50 stores, looking to replace lost shelf space at bankrupt Sears and counter the challenges Penney is facing. (Levi’s had been selling its lowest end Denizen brand at Target.) Target has also opened mini-Disney stores at 25 locations, much as Penney has long had, in time for the holidays, with more to come.

Target’s ability to get shoppers to visit stores is proof that customers will shop in person in an appealing location that also offers some surprises, such as the temporary design collaborations that have long been its bread and butter, and its Wondershop areas at the front of stores offering new products constantly.

Shopper visits to Target were up 3.1% last quarter, even as its digital sales rose 31%, showing how both sides feed business to each other. Target has invested heavily in setting up stores to handle curbside pickup service and in-store retrieval for online orders. Its also offers same-day delivery offering through Shipt, a company it bought two years ago.

Meanwhile, Macy’s and Kohl’s struggle to eke out modest overall sales despite their strong online revenue, suggesting their businesses are merely shifting from one avenue to another.

It’s not to say that the department stores can’t fight back. Kohl’s operates clean stores, is seeing store traffic rise thanks to its Amazon returns service, and is landing some good new brands such as the Olsen twin’s Elizabeth & James clothing line. Macy’s, which is reporting its quarterly results on Thursday, has a strong e-commerce infrastructure and is mixing up its business up a bit with things like Story at Macy’s that changes out merchandise every six weeks according to a theme and its area for re-sale site ThredUp. Even Penney has a plan to make stores more inviting, though it remains to be seen how much the financially challenged company can do.

But they need to hurry up. Target has strong momentum. It recently launched a new store brand of food items, Good & Gather, that, if successful, will lead to more frequent store visits for customers and pad Target’s lead over the department stores. (Walmart is similarly thriving at the moment, but its efforts are more focused on a full grocery service and on less fashion oriented home goods and apparel.)

“Our third-quarter results are further proof of the durability of our strategy, as we’re seeing industry-leading strength across multiple metrics, from the top line to the bottom line,” Cornell said. Target now has 10 straight quarters of comparable sales growth to support his claim.

How Target Is Taking Department Stores’ Business

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