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Target's bright spot: robust customer traffic

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Jenny Kipka waited at the checkout line.
Jenny Kipka waits at the checkout line at Target in Roseville.
Matthew Hintz for MPR News 2015

Updated: 3:25 p.m. | Posted: 5:28 a.m.

Target proved itself one of the few retailers that saw more customers both at its stores and online, though its investment in updating the stores hurt first-quarter profit. The discount retailer's share price closed down 5.7 percent on a day when the major stock indices all rose.

Target cited a combination of store remodeling, new brands and expanded delivery options as helping customer traffic rise 3.7 percent in the quarter, including stores and online. Target's CEO also acknowledged the tail winds of a strong economy.

It's Target's strongest performance in at least a decade and put it alongside chains like Costco and TJX that have posted robust increases.

"The consumer is very healthy, and they are spending more time shopping at Target," Target CEO Brian Cornell said Wednesday. "Traffic is such an important measure. It shows that the guests are voting with their wallet."

Minneapolis-based Target also saw a solid 3 percent increase in sales at established stores. Cornell said strong sales growth in its home, essentials and food and beverage categories offset the impact of delayed sales in weather-sensitive categories like clothing. Online sales rose 28 percent in the quarter.

While Cornell called customer visits the "true indicator for the health of the business," investors focused on profits, and its shares fell more than 5 percent.

The quarterly profit missed Wall Street estimates as Target's price cuts and its investments in stores and online operations weighed on the bottom line. It's an issue for many chains including Walmart that are plowing more money into the online delivery options shoppers want, but that also squeeze profits.

It's a tricky balancing act. Stores need to expand their online product offerings and services, but they have to do so without hurting store traffic. Target said it doesn't break down traffic by stores and online.

"In the age where people are buying online, the value of traffic has become immense," said Ken Perkins, president of the research firm Retail Metrics LLC. He described the robust traffic figure as a "rarity."

Target is re-investing more than $7 billion through 2020 to update stores and open smaller locations in urban markets. It's also revamping its store brands. The company also increased the minimum hourly pay to $12 starting this spring, the second hike in a matter of months.

"Target is taking on so many initiatives right now, all of which make a lot of sense," said retail strategist Carol Spieckerman.  "But it will take time for all of those initiatives to gain traction."

With last year's acquisition of same-day delivery service Shipt for $550 million, Target offers same-day delivery to more than 700 stores. Target is also expanding next-day delivery for household essentials nationwide and cutting the fee to $2.99 per order. It's free for its loyalty card members.

But Spieckerman doubts that Target's plan to ramp up home delivery of groceries is going to help the retailer much.

"If you're delivering groceries to people, they are not in the store," she said. "They're not looking at those higher margin items that drive the business."

Target earned $718 million, or $1.33 per share for the quarter. Earnings, adjusted for pretax gains and to account for discontinued operations, were $1.32 per share, short of the $1.38 expected, according to a poll by Zacks Investment Research.

Revenue jumped to $16.78 billion, edging out projections for $16.53 billion.

For the current quarter, Target expects per-share earnings of $1.30 to $1.50, about in line with expectations. It projects full-year earnings of $5.15 to $5.45 per share, compared with the $5.29 analysts expect.