With the weakening economy, Target has been walking a delicate tightrope, trying to convince consumers its prices are as low as Wal-Mart’s while touting its designer partnerships and style-driven products. Target Corp.’s second-quarter financial results, released Tuesday, indicate the retailer hasn’t quite convinced consumers they’ll find the bargains they seek.
Net earnings in the quarter ended Aug. 2 were down 7.6 percent to $634 million, compared with $686 million in last year’s second quarter. Earnings per share increased 2.4 percent to 82 cents, from 80 cents in the 2007 period.
Sales in the second quarter grew 5.7 percent to $15 billion, from $14.2 billion in 2007, due to the contribution from new store expansion. But same-store sales at the Minneapolis-based chain declined 0.4 percent for the second quarter, reflecting shoppers’ cautious approach to spending.
“The pace of sales growth continues to be our number-one challenge,” said Douglas A. Scovanner, executive vice president and chief financial officer on a conference call. He noted that for the last three quarters, comp-store sales have hovered slightly above or below zero, with store traffic down 1 to 2 percent.
“As we look across the next several quarters, sales growth will be the number one factor in determining our overall performance,” he added.
Scovanner said the average transaction size rose in the second quarter, driven by higher average retail prices per unit, but this was offset by a decline in the number of trips consumers made to stores and a decrease in the number of categories they visited. The biggest declines in store traffic were recorded in discretionary spending categories such as apparel and home.
Not surprisingly, Target is pushing its “Pay Less” message. Store signage, endcaps filled with low-priced items and weekly circulars featuring spreads with fewer products on each page, bigger images, bold price points and strong value headlines are among the tactics the retailer is using to lure shoppers.
“We’re increasing our emphasis on Pay Less,” said Greg W. Steinhafel, president and chief executive officer. “We’re making sure our prices are the same as Wal-Mart’s on identical products.” Wal-Mart, however, last week turned in a much stronger performance in its second quarter, registering double-digit increases in profits and sales.
“In this very hostile environment it was a very respectable performance,” Walter Loeb, president of Loeb Associates, said of Target’s second quarter. “Their earnings were above expectations, they lowered SGMA and bought back a lot of stock, which helps earnings.”
“Target’s in a very difficult spot right now because they don’t sell as much food as Wal-Mart does,” said Bill Dreher, a retail analyst at Deutsche Bank. “The discretionary merchandise simply is not moving now. The perception is that they’re [Target], not the rock-bottom bargain basement price.”
Target may be emphasizing low prices, but it’s not abandoning its design-driven approach. “Great design is part of our DNA,” said Kathryn A. Tesija, executive vice president of merchandising. “We are continuing to differentiate our products.”
Yet Steinhafel conceded shoppers are “very cash-strapped now. Our greatest strength has become somewhat of a challenge in that our stores are fun and unique and we have both what you need and what you want. In these economic times, some of our consumers don’t want to be tempted.”
Target nonetheless hopes customers will be lured by the launch of its new Go International private label collection next month, followed by new designer partnerships in October with Jonathan Saunders for apparel, Anya Hindmarch for handbags and Sigerson Morrison for shoes. Next week, Target will introduce three designer-driven cosmetics lines from Gemma Kidd, Pixie and Napoleon Perdis. “We have significantly evolved our beauty offerings,” said Tesija. “Guests will buy relatively higher price points in beauty, despite the economy.”
To showcase the new brands, Target will open four pop-up stores, or “bullseye bodegas” as the retailer calls them, in New York in Midtown, Union Square, SoHo and the East Village on Sept. 11.
Target is implementing a segmentation strategy to customize assortments, timing, presentation and space allotment to individual stores and local preferences. Steinhafel said this initiative will continue to contribute to margin results. “We are also capitalizing on the opportunity of our share price to engage in substantial share repurchase, which we believe will generate significant value for our shareholders over time,” Steinhafel said.
The retailer plans to open 45 stores in October, including its first two units in Alaska. Target will enter Hawaii in 2009. However, the company is reducing its projected new store count for 2008 and 2009 by 20 units and lowering capital expenditure for the two years by $1 billion to between $4.1 billion and $4.3 billion for each of 2008 and 2009.
“We’re modestly reducing our expected store openings as a result of the difficulties developers are facing,” said Scovanner. “Many of our external development partners have experienced challenges in obtaining funding and/or filling in-line space in certain large power center projects that were anticipated to open in 2009.”
Target’s credit card business is challenging, with an annualized net write-off rate of 8.7 percent in the quarter, higher than the 7.7 percent the company projected.
Profits in the credit card division declined 65 percent to $74 million from $213 million in the same period a year ago, due to a decline in overall portfolio yield and Target’s reduced investment in the portfolio. The average receivables directly funded by Target in the second quarter dropped 19.8 percent to $3.6 billion from $4.5 billion a year ago, reflecting the impact of J.P. Morgan Chase’s investment, partially offset by a $1.8 billion increase in average receivables.
Target’s shares on Tuesday closed at $49.72, down 33 cents, on the New York Stock Exchange.
The annual Veuve Clicquot Polo Classic in Pacific Palisades this weekend drew Kate Hudson, Tracee Ellis Ross, Laura Dern and more. See pictures of the star-studded event on WWD.com. (📷: @chelsealaurenla) #wwdeye
In his new book “Hollywood Royale,” Andy Warhol’s Protégé Matthew Rolston celebrates the Eighties revival of Hollywood glamour. Featuring more than 100 portraits taken by Rolston from 1977 to 1993, the book contains photos of icons like Michael Jackson, Cyndi Lauper, and @drewbarrymore, pictured here in 1991. “Hollywood Royale,” out today, will be accompanied by an exhibition opening at Los Angeles’ Fahey/Klein Gallery on March 1. #wwdeye
"Nowadays when life is not so happy with everything going on in the world, I think people come to me for a little bit of whimsy and color and fun." - Designer Rebecca De Ravenel on her cult-favorite jewelry line. (📸 : @vsteves) #wwd40
“Everyone is talking about how the retail industry is struggling, but I think it’s an incredible time because brands who are doing something different and innovative are setting themselves up for the future,” said @adamgoldston, who founded the luxury athletic brand @apl with his brother @ryangoldsten. The Goldston’s are part of WWD’s 40 under 40: a group of industry notables. See the rest of the list on WWD.com. (📷: @vsteves) #wwd40
@eyeswoon blogger Athena Calderone debuted her first-ever cookbook, “Cook Beautiful,” which is heavily centered on the presentation and visual expression of food. Pictured here are her miso glazed carrots from the book. Get the recipe on WWD.com. (📷: @johnny_miller_) #wwdeye
“It’s passion that helps get anybody to a certain point and it’s what’s propelled me,” said Kith founder @ronniefieg, one of WWD’s 40 under 40: a group of industry notables who are changing the face of retail, fashion and beauty. Fieg, who opened a Manhattan flagship on October 7, began his career at age 13 as a stock boy and salesman for footwear chain David Z. “I think staying true to [my] beliefs, hard work and passion have gotten me to where [Kith] is today.” See the rest of the 40 at WWD.com. (📷: @vsteves) #wwd40
25-year-old @samweaving is about to break out this fall, starring in Netflix’s horror film “The Babysitter,” fittingly out today on Friday the 13th. That’s not the only place you’ll be seeing her, though — Weaving’s got a role Showtime’s “SMILF” and another alongside Frances McDormand and Woody Harrelson in “Three Billboards Outside Ebbing, Missouri.” Though she’s got a full plate at the moment, there’s one role she’s got her eye on: Marilyn Monroe. “I’m a little too young at the moment, but it’s on my bucket list,” the actress told WWD (📷: @dandoperalski) #wwdeye
BFF's Poppy Jamie and Suki Waterhouse celebrated the launch of their bag line Pop x Suki at Nordstrom last night. "The line is really about our friendship, and how we are so different but complement each other," said Waterhouse. 👯 (📷: Katie Jones) #wwdeye
After designing the new @louisvuitton and @bulgariofficial flagships and a @chanelofficial boutique opening in Japan, @petermarinoarchitect has another project on his plate: The Lobster Club. Located in the Seagram Building, it’s the famed architect’s first restaurant project in New York, serving up modern Japanese brasserie-style cuisine. Bronze hues, bespoke material detailing, blush and chartreuse tones and a heavy emphasis on Picasso can be seen throughout. Mark your calendars for Nov. 1 for the much-anticipated opening. (📷: @clint_spaulding) #wwdeye