Add Target Corp. to the list of retailers now bearish about the rest of the year.
This story first appeared in the August 22, 2013 issue of WWD. Subscribe Today.
The discounter on Wednesday revised downward its outlook for the third quarter and full year, joining the likes of Macy’s Inc., Wal-Mart Stores Inc., Nordstrom Inc. and Kohl’s Corp. The revision and weakness in the Canadian operations — as well as Target’s 13.2 percent decline in second-quarter net earnings — sent the retailer’s shares down sharply on Wall Street, where they fell 3.6 percent to $65.50.
Target was one of a slew of retailers’ shares falling in Wednesday’s overall decline in the S&P 500 Retailing Industry Group of 0.8 percent, or 6.82 points, to 814.54. The index was particularly dragged down by American Eagle Outfitters Inc.’s 9.9 percent share price drop after it, too, lowered guidance for the third quarter.
Target reported net earnings of $611 million for the second quarter, down from $1.1 billion the prior year, on a 2 percent rise in sales to $17.11 billion, compared with $16.77 billion in the previous year. Earnings per share were 95 cents.
Target’s U.S. sales in the second quarter increased 2.4 percent to $16.8 billion from $16.5 billion last year, reflecting a 1.2 percent increase in comparable-store sales combined with the contribution from new stores. Target’s second-quarter adjusted earnings per share of $1.19 were at the top of the expected range, despite the softer-than-expected U.S. comparable-store sales increase of 1.2 percent. Net earnings for the first half declined 20.8 percent to $1.11 billion, from $1.4 billion in the 2012 first half. Sales were $33.82 billion, a 2.5 percent rise over the prior year’s first half of $32.98 billion.
The retailer said it expects EPS of 55 to 65 cents in the third quarter, well below the consensus estimate of 88 cents. For full-year 2013, Target now projects EPS of $3.75 to $3.95, down from the previous guidance of $4.25 to $4.45 and the consensus estimate of $4.32, due to dilution related to the Canadian segment of about 82 cents a share, due to the early retirement of debt of about 42 cents a share and net accounting gains of about 29 cents associated with the sale of Target’s entire consumer credit card receivables portfolio to TD Bank Group. Third-quarter comps of 1 to 2 percent were projected, with full-year comps revised to 1 percent from an earlier of 2 to 2.5 percent.
“For the balance of this year, our U.S. outlook envisions continued cautious spending by consumers in the face of ongoing household budget pressures,” said Gregg Steinhafel, chairman, president and chief executive officer. “Across the company, we’re moving quickly to position the business to succeed in this rapidly changing retail environment.”
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Canada, where Target opened 44 stores in the second quarter for a total of 68 units, generated sales of $275 million at a gross margin rate of 31.6 percent. Steinhafel conceded that sales and profit momentum in Canada have been slower to build than expected. Home and apparel performed above expectations, but sales of items that drive frequent shopping trips fell short. “We know there is a gap in guest awareness of how low our prices really are,” Steinhafel said. “We’re deploying multiple tactics. Our efforts will drive greater awareness of frequently purchased items.”
The trajectory of sales in Canada matches the retailer’s U.S. launches, beginning with slower momentum and growing to “our fifth-year sales goal,” Steinhafel said. “We invested in this segment to position it for long-term success.”
Deborah Weinswig, a retail analyst at Citi, said “We’re concerned about discounting and soft traffic in Canada, where sales missed our estimate of $363 million.”
Profitability in Canada in 2014 is a stretch. “We have to get another 56 stores open and get through the holiday,” Steinhafel said. “We’ll start to grow sales, but it’s unlikely we’ll see profitability for the full year.”
Chief financial officer John Mulligan said misjudging the market was a factor in incremental dilution. “We [had] a set of sales expectations and given all the excitement we saw building over two years [prior to the launch] sales have been disappointing. There’s some excess inventory and the need to right-size the entire expense structure.”
Canadian segment earnings before interest and taxes for the second quarter was a $169 million loss, as gross margin of $87 million was offset by $207 million of start-up and operating expenses and $49 million of depreciation and amortization. Canadian operations reduced Target’s GAAP earnings losses per share to 21 cents in second quarter, compared to an earlier estimate of a 16-cent loss.
Back in the U.S., Target wants to “further shrink the size of this store format,” Steinhafel said. The reduced prototype allow the retailer to enter a variety of real estate situations, including possibly opening stores on campuses.
“Consumer confidence statistics improved this year, but optimism among lower-income households is lagging behind,” said Kathryn Tesija, executive vice president, merchandising and supply chain. “This year’s payroll tax increase is also crowding out spending. We’re building flexibility in our inventory plans and creating merchandise and marketing with compelling offers.” Target wants to be a one-stop shop for back-to-school, fashion, school supplies and accessories priced under $20 and over 400 items for $1 or less.
Target completed the beta launch of Cartwheel, the mobile coupon platform on Facebook. “We’re investing in speed, search, product checkout and way finding,” Tesija said. “We continue to invest to integrate the shopping experience across channels.” Buy online and pick up in-store, a capability competitor Wal-Mart offers, will be available in Minneapolis in the third quarter, with a complete rollout to all stores by the holiday season. Target is working to deliver online orders from stores as early as the same day.
A test of beauty concierges in Chicago has been rolled out to 200 stores. The retailer this month acquired DermStore, which will provide access to a broad assortment of prestige brands. “We’ll continue to monitor and identify opportunities to augment [e-commerce] through acquisitions,” Tesija said.
While some Wall Street analysts have been unimpressed by Target’s apparel of late, Phillip Lim’s limited time collection for Target will bow on Sept. 15 with men’s and women’s apparel, accessories and shoes, priced $20 to $300. Matt Nemer, a retail analyst at Wells Fargo, said, “We think an overall lack of fashion in the apparel category could result in softer comps, although this could be partially offset by strength in home and specifically Target’s Threshold product line.”
In the second quarter, Target paid dividends of $231 million. The board approved a 19 percent increase to the quarterly dividend, the 42nd consecutive year that Target has increased its dividend, Steinhafel said.