Target Corp. (TGT) is leaping ahead of many of its retail peers as it joins Walmart Inc. (WMT) , Costco Wholesale Corp. (COST) and Amazon.com Inc. (AMZN) as formidable competitors in a sector that is dividing starkly into winners and losers.
Shares of the eighth-largest retailer in the United States jumped nearly 9% after its first-quarter earnings print hit the wires before settling in at a rise of about 7% before the opening bell Wednesday.
"This market is of one mind," Action Alerts PLUS portfolio manager Jim Cramer wrote in a column on Wednesday morning. "Endless punishment for the losers and endless praise for the winners, with the only exception being a comment from management that says the tariffs are too hard to handle."
The move in Target's stock is promoted by an uncharacteristically strong report for a retailer, highlighted by a beat on the top and bottom lines and a 4.8% increase in same-store sales, which marked the ninth consecutive quarterly gain for the company.
"Target had an outstanding first quarter, as our team delivered a great experience for our guests and drove strong growth in traffic, comparable sales, operating income and earnings per share," CEO Brian Cornell said in a statement. "Target's first-quarter performance and market-share gains demonstrate that the model is working."
The model of the company has clearly set it apart from higher-priced peers such as Nordstrom Inc. (JWN) , which lamented its struggling business, and key discount competitors Kohl's Corp. (KSS) and J.C. Penney Co. (JCP) .
Analysts noted that much like the other retailers that have done well this earnings season, convenient e-commerce options were a driver of Target's earnings result.
"TGT's investments are driving market-share gains and same-day fulfillment services (Order Pick Up, Drive Up and Shipt) drove well over half of the Company's digital sales growth," KeyBanc Capital Markets analyst Edward Yruma said, noting "continued momentum" for the retail sector stalwart.
Target's Cornell noted that he expects this trend to continue to drive earnings as the year progresses as he reaffirmed the company's prior guidance.
"Throughout this year, we will continue to extend the reach of our same-day fulfillment options, strengthen our portfolio of owned and exclusive brands, remodel and open more stores and invest in our team," he said. "We're confident that we're well-positioned to deliver strong financial performance in 2019 and beyond."
To be sure, Target likely will deal with issues that include a race to the bottom that could squeeze already-tight margins at Target.
Target's convenience and e-commerce effort have been blamed for margin erosion in recent quarters due to the cost of implementing and executing such initiatives.
"First-quarter gross margin rate was 29.6%, compared with 29.8% in 2018, reflecting higher digital fulfillment and supply chain costs, partially offset by the benefit of merchandising strategies," the company noted in an SEC filing.
The margin erosion has been central to the bear theses on Target stock in recent quarters and could be amplified by cost cutting by lagging competitors that are eager to regain customers.
"Dept. store peers that reported this week seem to have carried inventory into the spring and also indicated plans to be more aggressive on pricing/ promos," Credit Suisse analyst Seth Sigman warned.
Still, Sigman said the dynamic in the retail sector has shifted "and Target has shown an ability to tread higher whilst peers plummet."
"While this does add some risk to TGT's Q2 GM, the company has been out-comping (home+apparel categories) department store/ off-price peers, helped by the strength of its private brands which should position TGT strongly," he concluded.
Sigman set an "Outperform" rating on the stock with an $85 price target, which would suggest a recovery back to the stock's mid-April highs.
An earnings conference call in which management will seek to sustain the market optimism is underway. Click here to tune in.
