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Why Target is crushing it (it's very simple to understand)

Brian Sozzi
Editor-at-Large

And then there is Target (TGT).

Amidst a sea of worse than expected first quarter earnings and outlooks from Kohl’s (KSS), Macy’s (M) and Nordstrom (JWN) — and nervous sounding executives on conference calls just waiting for the tariff impact question from nosy analysts — Target gave its investors a reason on Wednesday to be hopeful this year.

Perhaps Target’s start to the year shouldn’t be much of a surprise, provided one is watching the retailer’s efforts closely.

Target’s total first-quarter same-store sales rose 4.8% (includes online sales), ahead of most Wall Street estimates, spurred mostly by an improvement in customer traffic to Target stores. Online sales surged 42% from the prior year, an acceleration from recent quarterly trends.

Interestingly, Target’s operating profit margin expanded to 6.4% from 6.2% a year ago. Considering Target’s ongoing investments to lower food prices and in digital, operating margin expansion of any kind is a huge positive. Indeed operating margin expansion was far from the norm for broader retail in the first quarter due to weak sales (thank you terrible weather), higher hourly wages and online investments.

Target’s earnings of $1.53 a share crushed forecasts for $1.43 a share. Target shares popped more than 8% in pre-market trading.

If one were to ding Target a bit, it’s with its outlook.

For 2019, Target only reiterated its earnings guidance for a range of $5.75 to $6.05 a share. Same-store sales are expected to increase by a low- to mid-single-digit percentage.

Maybe it’s Target playing it cautiously due to the tariff unknown. An understandable move. But clearly, investors are more locked into the performance in the first quarter setting the stage for an earnings guidance lift coming out of the second quarter.

How did Target get in a better position

Shoppers browse the aisles at a Target store in Newport, Ky. Black Friday. (AP Photo/John Minchillo)

Target’s success could be boiled down to a few areas.

First, an ambitious store remodeling plan. Target remodeled 400 locations between 2017 and 2018 as part of a $7 billion capital investment plan unveiled in 2017. The discount retailer said during a presentation to analysts earlier this year that it will remodel 300 stores in 2019 and another 300 in 2020.

Target’s remodels are generally focused on spiffing up the look of its important grocery, electronics, apparel and cosmetics departments. Further, the remodels often include expanded space allocated to each of those categories. Other focal points include designated online pickup spots in stores and warmer store fronts.

Some have even included slicker looking Starbucks (SBUX) locations, which are often found at the front of Target stores.

The reality is that these fresher looking stores entice people to buy more and visit more. Yours truly can attest to that one.

Meanwhile, Target continues to have success with its buy online, pick up in store/ship from store programs. Customers appear to be singling out Target (and yes, Walmart (WMT) too) as offering the holy grail in retail right now — seamless shopping.

Sprinkle in more competitive prices on food and other household essentials, and you have Target’s first quarter in a nutshell.

We aren’t fanboying over Target here by any stretch of the imagination. Target deserves a shout out for a series of successful quarters. The same could be said for heated rival Walmart — CEO Doug McMillon sounded like a man on a mission in my recent talk with him at the company’s headquarters.

These big box discounters are taking Amazon (AMZN) head on, and showing they can — and are — winning. Yes, there is life beyond Amazon.

Brian Sozzi is an editor-at-large and co-host of ‘The First Trade’ at Yahoo Finance. Follow Brian Sozzi him on Twitter @BrianSozzi

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