Target Corp., Minneapolis, is taking steps to improve the performance of its U.S. and Canadian business segments following lower earnings and flattish sales during the second quarter ended Aug. 2, company executives told investors.
Some industry analysts said they expect more challenges for Target before things turn around.
“Target continues to struggle with retailing basics in both its U.S. and Canadian divisions,” said Kelly Tackett, U.S. research director for Planet Retail, London. “In its home market, improving store-level execution and delivering newness and excitement in marketing and merchandising must be at the top of the to-do list.
“Although ultimately surmountable, the problems Target faces in returning to comparable-store sales growth in the U.S. and saving its Canadian operations aren’t ones with easy fixes. Expect several more tough quarters before we begin to catch glimpses of the Target of tomorrow.”
For the second quarter ended Aug. 2, net income declined 61.7% to $ 234 million, while sales increased 1.7% to $ 17.4 billion and comparable store sales were flat. For the first six months, net income fell 41.2% to $ 653 million, with sales rising 1.9% to $ 34.5 billion and comps declining 0.2%.
Digital sales increased more than 30%, “which more than offset a decline in business to our conventional sites,” merchandising EVP Kathryn Tesija pointed out.
EVP and CFO John Mulligan — who served as interim CEO earlier this year before the company hired Brian Cornell as chairman and CEO — said second-quarter results “didn’t meet our expectations, [but] we are seeing some early signs of progress. In the U.S., traffic trends continue to recover and monthly sales are improving, with July comps up more than 1%. Better U.S. sales have continued into August, driven by early back-to-school results.”
The company also announced plans to expand the test of its 20,000-square-foot Target Express format to several additional locations outside the Twin Cities next year, based on results at the first Express store, which opened in late July adjacent to the University of Minnesota campus.
“So far sales have come in as expected, and not surprisingly, we are seeing much more traffic in a much smaller basket than our chainwide average,” Tesija said.
Target plans to cut back on promotional levels in the U.S. for the balance of the year, John R. Hulbert, senior director, investor communications, said. “The level of promotions in the second quarter was elevated, and looking ahead, we plan to moderate our promotional intensity to a level we believe is more appropriate in the long run.”
In Canada, Tesija said Target is working to improve its operations by developing better reporting methods to identify out-of-stock issues sooner; responding more quickly to competitive pricing moves, including more frequent comparison shopping on more items; and adding approximately 30,000 new items to its assortment, including more exclusive items and designer partnerships.
The initiatives in Canada are focused on delivering improved results by this year’s holiday season, Tesija noted.
Sales in Target’s U.S. segment rose 0.7% to $ 17 billion during the quarter, while sales in the Canadian segment rose 63.1% to $ 449 million, reflecting the contribution from new stores, although those numbers were partially offset by a decline in comp sales of 11.4%. Target said the decline reflected comparisons with strong grand-opening sales surges in 2013, combined with the impact of market densification later in the year, which redistributed sales from earlier store openings.
Tesija said second-quarter sales in Canada “accelerated meaningfully from the first quarter but fell somewhat short of expectations,” with lower gross margins than expected, “driven by elevated markdowns resulting from continued operational issues.”
Target said the data breach in last year’s fourth quarter resulted in expenses of $ 148 million, which were partially offset by recognition of a $ 38-million insurance receivable.