Target Sales Boosted By Billion-Dollar Store Revamps, But Margins Squeezed

Target Corp. turned in a solid first quarter, with same-store sales up 3% year over year, and Q1 traffic growth of 3.7%, which the company said is the strongest quarterly performance in over 10 years.

But its renovation program is coming at a cost to profit margins, the Wall Street Journal reports.

At the end of Target's Q1, its profit margin was 4.28%; at the end of the previous quarter, it was 4.84%. A year ago, the metric was roughly the same: 4.25%.

The first-quarter operating income margin rate was 6.2%, compared with 7.1% in 2017. First-quarter gross margin rate was 29.8%, compared with 30% in 2017, reflecting pressure from digital fulfillment costs and sales mix, the company reports.

Target's program to renovate stores and otherwise juice up the customer experience is massive. The company plans to spend a total of about $7B over three years to not only revamp stores, but also up its game in private-label apparel and home brands, and make pickup locations for online purchases more prominent. 

During the first quarter, Target completed 56 remodels and kicked off another 113. It opened seven new stores nationwide, six of which were small-format locations, and announced plans for 10 additional new stores in the coming years.

"In the first quarter, we completed more than double the number of remodels we delivered a year ago," Target CEO Brian Cornell said during the company's conference call this week. "Beyond the direct feedback we're hearing from our guests, we continue to see incremental 2% to 4% sales lifts in stores following the completion of a remodel.

"Beyond these wall-to-wall transformations, we continue to roll out presentation enhancements to a broader set of stores focused on key categories, like beauty, apparel, home and food and beverage."

The company is also trying to stay ahead of pressure to raise retail workers' wages. Minimum wage for all existing employees is $12/hour, with plans to raise the rate to $15/hour by the end of 2020.

Last year, the company bought grocery delivery specialist Shipt for $550M to build up its same-day delivery capability, a move that might be showing results. In Q1, digital sales increased 28% compared with last year, on top of 21% annual growth in the first quarter of 2017.