Target shares pop as retailer boosts profits, despite lackluster sales forecast

Target on Tuesday posted holiday-quarter revenue and earnings that topped Wall Street's expectations, but the company said it expects another year of weak sales. 

The Minneapolis-based retailer's shares jumped about 10% in premarket trading as it showed progress in boosting profits and margins.

Even so, Target's comparable sales declined for the third quarter in a row. The key metric, which includes digital sales and takes out the impact of store openings, closures and renovations, fell 4.4% in the fiscal fourth quarter. 

Target doesn't anticipate sales will bounce back quickly. For the current quarter, the company said it expects comparable sales to drop by between 3% and 5% and adjusted earnings per share to range from $1.70 to $2.10. Target said it expects full-year 2024 comparable sales to be flat to up 2% and adjusted earnings per share to range from $8.60 to $9.60.

Yet Target stressed its progress after a rough stretch marked by lower discretionary spending. Store and website traffic, while still down year over year, improved for the second quarter in a row. Profits jumped as the company better managed inventory and benefited from falling supply chain, freight and e-commerce fulfillment costs. And an emphasis on lower price points resonated with shoppers. 

In an interview Tuesday with CNBC's "Squawk Box," CEO Brian Cornell said the company has made "really solid progress" in managing inventory better and becoming more efficient. He said the retailer will focus on "growing traffic and making sure that we make Target a growth company again."

Those new sales drivers for the year ahead will include a membership program, he said. Cornell declined to share more details to CNBC, but said "it's going to be a really important part of what drives growth for us as we go into next year." He added that the company plans to emphasize same-day delivery to the home, so that customers can get groceries or other items within two hours. Target already owns Shipt, a membership-based delivery service.

Company leaders will share more of their strategy at an investor meeting in New York City on Tuesday.

Here's what the retailer reported compared with what Wall Street was expecting, based on a survey of analysts by LSEG, formerly known as Refinitiv:

Target's sluggish sales have reflected a pullback in discretionary spending over the past two years, especially after huge pandemic-driven gains. Its annual total revenue grew by about $31 billion – or nearly 40% – from fiscal 2019 to 2022 before sales leveled out. Target also said it took a hit in recent quarters from elevated levels of theft and the fallout from backlash to Target's merchandise collection for Pride month.

To attract shoppers, the big-box retailer has emphasized value and more frequently bought categories, such as food and beauty. Over the holiday season, for example, Target touted a wide assortment of gifts and a holiday meal for four for under $25. 

Last month, it launched a new low-priced private brand called Dealworthy, with products like socks, paper towels, laundry detergent and more. Most items cost under $10.

Target's profits have suffered along with its sales. But the retailer made more money in the fourth quarter than it did a year ago, as it marked down fewer items and had more products in stock. 

Target's net income for the three-month period rose by nearly 58% to $1.38 billion, or $2.98 per share, from $876 million, or $1.89 per share in the year-ago quarter. That was significantly higher than Target's forecast range of between $1.90 and $2.60 per share.

Its margins also were healthier compared with a year ago. Its fourth-quarter operating income margin rate was 5.8% compared with 3.7% in the year-ago quarter, a time when Target's results took a hit as customers bought fewer higher-margin items like clothing, and more of lower-margin ones, such as food and household essentials.

In the fiscal fourth quarter that ended Feb. 3, Target's total revenue grew nearly 2% from $31.40 billion in the year-ago period. Those results got a boost from an additional week of sales compared with fiscal 2022.

Comparable sales dropped in stores and online. Comparable store sales fell 5.4% year over year. Digital sales declined 0.7% year over year, marking an improvement from the 6% drop in the third quarter.

The sequential improvement in traffic trends – from a 4.1% decline in the third quarter to a 1.7% decline in the fourth quarter – was fueled by more shoppers using curbside pickup. 

As of Monday's close, Target's shares are up nearly 6% so far this year. That falls short of the approximately 8% gains of the S&P 500 during the same period. Target's shares closed Monday at $150.49, bringing the company's market value to $69.48 billion.

Correction: In the fiscal fourth quarter, Target's total revenue grew nearly 2% from $31.40 billion in the year-ago period. An earlier version misstated a figure.

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