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Target Remodels, New Services Drive Traffic

Retailer said investments are paying off, but Q1 profits slow

Customers are responding favorably to investments in stores, pricing and digital at Target Corp., which reported its highest quarterly increase in store traffic in more than decade, even as expenses weighed on profits.

Traffic to Target stores increased by 3.7%, helping comparable-store sales improve by 3% in the fiscal first quarter, which ended May 5. Officials in a conference call said sales have since accelerated in the second quarter.

“For several years now, I've talked about the importance of traffic as a true indicator of the health of our business,” CEO Brian Cornell said during a conference call. “I think the guest is reacting to our new remodels, to the new brands, to our new fulfillment options, to what we're doing from a digital standpoint. All of these elements have come together, and the guest is rewarding us with increased traffic.”

Target has invested millions in store remodels and technology, including the acquisition of the same-day delivery facilitator Shipt, while expanding fulfillment options such as Target Restock. While these investments are helping to fuel Target’s new momentum in stores—and online, where sales grew by 28%they came at a cost to earnings in the quarter, which were below expectations.

Operating income margin dipped to 6.2% from 7.1% in the same quarter last year, while gross margin as a percent of sales dropped 20 basis points to 29.8%.

Sales totaled $16.6 billion, a 3.5% increase, while earnings increased 5.9% to $718 million.

Officials said food comps were consistent with growth in other categories and increased for the fifth straight quarter, a performance Chief Merchandising Officer Mark Tritton attributed to “price and promotions, assortment, presentation and our focus on the fundamentals.” Comps were strongest in the beverage and produce categories, and Target saw a “really strong performance” in the Valentine’s day and Easter holidays, he said.

Target completed 56 remodels and opened seven new stores in the quarter. In addition, Target launched its new Drive-Up service in more than 250 stores, expanded its Target Restock nationwide and rolled out same-day delivery from more than 700 stores, enabled by its recent acquisition of Shipt.

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