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Target Eyes Over 75 CityCenter Stores

Greg Steinhafel, chairman, president and chief executive officer, envisions strong sales in apparel and home.

Target Corp. has big plans for its CityTarget format.

As the discounter released second-quarter results and raised year-end guidance, Greg Steinhafel, chairman, president and chief executive officer, said, “We believe there are a lot of urban locations where we can’t open a prototypical store.”

He pointed to the retailer’s first foray into urban centers, adding, “We are very pleased with the initial response to the July opening of our first three CityTarget locations in Seattle, Los Angeles and Chicago.” CityTarget stores eliminated footwear and patio merchandise.

Steinhafel envisions “somewhere in the neighborhood of 75 units to a couple hundred” CityTarget stores. “There are very strong levels of sales in apparel and home. That’s a Target signature strength and it’s resonating in urban markets,” the executive said.

While the urban stores and expansion into Canada are two strategies that will be important to future growth, Steinhafel said “two transformative initiatives” played a role in the firm’s financial results for the second quarter. Target’s Red Card 5 percent rewards program generated incremental sales and profits and retained profit margins, while P-Fresh departments in stores “have really led the company. There’s still several years worth of growth from 5 percent rewards and P-Fresh.”

Target said there was a 2.4 percent increase in incremental spending in the quarter. “Before the launch of the loyalty (5 percent rewards), program, penetration was 5 percent and headed lower. We see average incremental spending of more than 50 percent,” the company said.

Target on Wednesday said net earnings in the second quarter were flat at $704 million, or $1.07 a share, up 3.7 percent over last year’s $1.03, and for the six months, net earnings rose 0.6 percent to $1.4 billion, or $2.12 a share, a 4.4 percent gain over $2.03 for last year’s six months. Target reported adjusted earnings per share of $1.12 in second quarter, up 4.6 percent from $1.07 in 2011.

Sales in the second quarter rose 3.5 percent over the 2011 second quarter to $16.45 billion, and in the six months, sales advanced 4.8 percent over last year’s period to $32.9 billion.

Total revenues for the second quarter ended July 28 were $16.78 billion, a 3.3 percent increase over the same period of 2011. Revenue for the six months ended July 28 were $33.6 billion, an increase of 4.6 percent over the six-month period in 2011.

Comparable-store sales rose 3.3 percent in the second quarter and 4.2 percent in the six months, the company said.

Gross margin for the second quarter was $5.15 billion, a 2.6 percent increase over last year and, for the six months, $10.15 billion, up 3.9 percent. Selling, general and administrative expenses also rose 2.6 percent to $3.47 billion, and $6.76 billion for the six months, a 3.2 percent rise.

Earnings before interest, taxes, depreciation and amortization in the second quarter rose 2.7 percent over 2011, to $1.69 billion, and for the six months was $3.39 billion, up 5.5 percent. Earnings before interest and taxes in the quarter was $1.18 billion, up 2.9 percent over 2011. For the six-month period, it was $2.38 billion, a 7.7 percent gain.

The second-quarter loss before interest expense and income taxes was $69 million, due to start-up expenses, depreciation and amortization related to the company’s expected entry into Canada in 2013. Total expenses related to investments in Target’s Canadian market entry reduced EPS by around 9 cents in the second quarter.

Steinhafel said the company is on track to open stores in Canada in the spring. Seven Zeller’s units are now being built. Target’s goal is to open 125 units in the Northern territories by 2013.

Kathryn Tesija, executive vice president of merchandising, said Target’s holiday collaboration with Neiman Marcus is highly anticipated. “Apparel had another great quarter with growth just short of overall sales,” she said. “The strongest growth was in men’s and women’s apparel and activewear.”

Tesija said beauty sales have been growing at a faster rate than total store sales. Target launched beauty service tests in 28 Chicago stores. Trained team members provide the service, which could be rolled out to other stores. There will also be in October a pilot in electronics departments with members of Best Buy’s Geek Squad in 28 stores in Denver and Minneapolis.

In terms of target.com, Tesija said year-to-date “online sales are running flat — far lower than we expect to see over time. Usability of the site is back. Visits are up dramatically. We’re still working on the conversion.”

Since the site was re-launched last year, the focus has been on improving stability, shopability and speed. “Consumers are rapidly moving into the mobile channel,” she said. “Our mobile traffic doubled last year and sales tripled.”

Steinhafel revealed that Target “today joined the Merchant Customer Exchange, a consumer-centric customer payment solution. We see significant potential in mobile payments with [MCX].” MCX is challenging more developed competitors such as Google Wallet and Verizon’s Isis.

Asked to predict the tenor of the holiday season, Steinhafel said it depends on whether other retailers run 70 percent off sales and do things that are not necessary to preserve our competitive business model.” We are going to very aggressively capture every sale we can,” he said. “We’re going to be a little bit leaner [in terms of inventory] and will balance sales with the other side. There’s more uncertainty now about the fourth quarter with the presidential election. Set aside J.C. Penney; Wal-Mart continues to be very aggressive on price, but they’re always aggressive on price. They’re aggressive but consistent. We’re seeing that across the board with the apparel retailers. We’ve been picking up share of apparel for some time. Certainly Penney’s is struggling, but it’s not having a meaningful impact on the big picture.”

Steinhafel reiterated Target’s big picture even as the company raised full-year guidance to adjusted EPS of $4.65 to $4.85 and GAAP EPS of $4.20 to $4.40.

“It’s been more than a year since we laid out long range plan to deliver $8 or more in earnings per share in 2017 and $100 billion in sales,” Steinhafel said. “Yet, despite the sluggish recovery, our financial performance has remained strong quarter after quarter and we’re on track to deliver our long range plan.”