Target (NYSE: TGT) announced better-than-expected first quarter results, as both its revenue and earnings per share came in ahead of market expectations. As a result, the company’s stock rose slightly after the first quarter earnings announcement. However, the company’s revenue declined 1% year-over-year (y-o-y) to $16 billion, primarily due to lower comparable store sales, partially offset by a slightly higher store count. Notably, Target’s digital sales grew 22% y-o-y in the first quarter, and accounted for 4.3% of total sales. Target also posted adjusted earnings of $1.21 per share, which was above the high end of the company’s guidance, but declined 6% y-o-y.

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Target’s gross margin was 30.5%, compared to 30.9% in Q1 2016. This slip was due to increased fulfillment costs resulting from the growth in the company’s digital sales. On the cost side, earnings before interest and tax margins were 80 basis points lower than the year ago period at 7.4% of sales, driven by a slightly higher selling and general administrative (SG&A) expense rate of 19.6%.

In Q1, the company invested nearly $500 million in the first quarter as part of the store transformation plan, which also included the expansion of small format stores. Going forward, the retailer plans to invest more than $2 billion this year during this transition phase. This strategy includes revamping stores, supply chain improvements and increased promotions (estimated investment of $7 billion over the next 3 years), and lower everyday pricing.

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In the first quarter, Target completed 21 existing store remodels and opened 4 new small format locations. For the year, the company plans to complete 100 remodels and add another 30 small format stores.

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Comparable Sales Decline Due To Weak Traffic

Target reported a 1.3% y-o-y decline in its comparable sales in Q1. Among the components of comparable sales, the number of transactions fell by 0.8% y-o-y and the average transaction amount declined 0.6% y-o-y. Along with this traffic decline, comparable sales in both essentials and food and beverages were down as well in this quarter.

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Future Outlook

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