Controlling what it can drives profits

Shares of Target may have popped last week after the company reported June sales, but the momentum won’t be sustainable until improvements are seen in average ticket and transaction size. Both metrics declined in June and caused same-store sales to drip by 6.2%, and a similar drop is expected in July. The comp decline was slightly worse than analysts expected, but Target compensated for the disappointment by advising that its second quarter profits would meet or exceed consensus earnings estimates of 64 cents. That made the market happy, at least temporarily, but these days profits at Target and a lot of other retailers are being driven by strong expense control and strict inventory management so markdowns can be avoided.

Target said it ended June with inventories in “very good” condition, but also noted that sales of apparel and home again experienced a low double-digit same-store sales decline. Difficulties in those areas are understandable given that consumers have cut back on discretionary purchases, but weak traffic trends suggest Target has more opportunity to let consumers know its prices are comparable, and in some instances lower, that those found at Walmart.