The news just keeps getting worse at Target Corp., but the beleaguered discounter’s new chief executive officer Brian Cornell isn’t afraid to jump into the fryer.
Target on Wednesday reported sharply lower net earnings, partially as a result of the spiralling costs of its embarrassing data breach last holiday season. The retailer also lowered its full-year profit outlook, showing things aren’t likely to turn around anytime soon.
But Wall Street seemed to look past all that bad news, sending the company’s shares up 1.82 percent to close at $61.03 in trading on the Big Board.
In his first conference call with analysts, Cornell dwelt less on the present — for obvious reasons — and more on the future, even as he failed to provide specifics as to how he is going to turn the retailer around.
“As a vendor partner, I’ve known Target as a smart, savvy, innovative, ethical and guest-focused merchandiser. As a competitor, I’ve known Target as a disciplined, tough, focused retailer; a company that redefined the discount space by delivering outstanding design, world-class fashion, innovative products and amazing prices. As a guest, my family and I have known Target as a unique place that makes shopping fun,” the ceo said.
And while there’s no question that he has challenges ahead in bringing back the cool factor at the discounter, he’s already hit the ground running.
Cornell said he just returned from Canada after meeting with the team there to get an update on strategy and operations. Target has misstepped badly in its Canadian expansion and last week unveiled a series of steps aimed at turning around the loss-making operation.
“While that review is not yet complete, based on what they’ve learned already, the Canadian team is making broad changes as they focus on improving performance in time for the key holiday season,” he said.
He’s also spent time with the U.S. team, making sure that everyone is focused on “execution across every aspect of our business, particularly in the holiday season. In addition, I’m deepening my understanding of Target’s pipeline of omnichannel innovation and I’m focused on our opportunities going forward.”
Before turning the call over to the executive team, Cornell also gave a hint of what he might be focused on going forward. He noted that while he’s “very impressed with the progress the team has made recently, including innovations on our mobile platform…we need to continue to move faster and grow faster than the marketplace.” He also spoke about needing to build capabilities to ensure that “digital and store operations operate seamlessly” in an omnichannel world.
For the three months ended Aug. 2, net earnings were $234 million, or 37 cents a diluted share, a 61.7 percent drop from net earnings a year ago of $611 million, or 95 cents. On an adjusted basis, earnings per share were 78 cents, meeting Target’s lowered second-quarter guidance on Aug. 5. Net sales rose 1.7 percent to $17.4 billion from $17.1 billion, although comparable-store sales were down 1.3 percent.
For the six months, net earnings fell 41.2 percent to $653 million, or $1.02 a diluted share, from $1.11 billion, or $1.72, a year ago. Net sales were up 1.9 percent to $34.5 billion from $33.8 billion.
Those results, in part due to charges related to its data-breach incident from last year, plus investment in the chain’s Canadian business, led the retailer to lower its full-year 2014 adjusted EPS guidance to $3.10 to $3.30 from prior forecasted range of between $3.60 and $3.90. It also said the updated guidance reflects year-to-date pre-tax data breach expenses of $129 million. The company said guidance does not include an estimate of future data breach-related expenses.
John Mulligan, executive vice president and chief financial officer, said of third-quarter expectations, “We’re currently forecasting U.S. comparable sales will be flat to up 1 percent this quarter” and noted that the company is posting “positive comps” so far in August. He also said that U.S. comp sales for the full year are expected in the “range of flat to up 1 percent.”
Kathryn A. Tesija, chief merchandising and supply chain officer, said that U.S. traffic trends improved a full percentage point compared with the first quarter. She added as a bright spot that early results in back-to-school indicate improved sales trends as consumers focus on the “occasion rather than promotions.” Digital sales rose more than 30 percent over last year, reflecting a nearly 50 percent increase in visits to Target’s mobile Web site. The company in June rolled out a free shipping program on all orders over $50 to curtail the number of abandoned online carts due to a surprise at checkout, such as uncertain shipping charges.
As for product offering, Sam & Libby footwear has been doing well, and Target next month will be extending the offering to include a Sam & Libby handbag line in more than 1,000 stores throughout the U.S. The company is expecting women’s boots to do well this fall, and in juniors will have an assortment featuring leggings, sweatshirts, yoga pants, joggers and fashion athletic footwear.
For apparel, Joseph Altuzarra’s limited-edition Altuzarra for Target collection of women’s ready-to-wear, lingerie, accessories and footwear will be available at most Target stores in the U.S. and Canada on Sept. 14. Women’s apparel for fall will reflect the “number-one current trend we call neo-traditional, with feminine, menswear-inspired looks in plaids and florals,” she said.
Sales in Canada during the quarter accelerated from the first quarter, but gross margins also were lower than expected, “driven by elevated markdowns resulting from continued operational issues,” Tesija said.
The team in Canada is addressing issues such as in-stocks, pricing and assortments, and is looking to add product lines. “Seeing all these changes together means of the 70,000 items in a typical Canadian store, about 30,000 items will be new between now and the holiday season,” she noted.
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