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As anticipated by most analysts, Target Corp. reported lackluster second-quarter financials this week as the retail struggles to rebound from a data breach last year that sent sales downhill.
The Minneapolis-based retailer’s Q2 U.S. sales increased just 0.7 percent over the year-ago period, to $17 billion, reflecting the contribution from new stores and flat comparable sales. Transactions declined 1.3 percent in Q2, an improvement of one percentage point over Q1, indicating that Target appears to be heading up and out of its hole.
“While results from the quarter didn’t meet our expectations, we are seeing some early signs of progress as we work to improve results in the U.S. and Canada,” said John Mulligan, Target EVP and CFO. “In the U.S., traffic trends continue to recover and monthly sales are improving, with July comparable sales up more than 1 percent. Better U.S. sales have continued into August, driven by early back-to-school results. In Canada, the team is making important changes to operations and the merchandise assortment with a focus on delivering improved results by this holiday season.”
Q2 adjusted earnings were 78 cents per share, a decrease of 20.6 percent from the 98 cents in the year-ago period. Target also reported net pre-tax data breach expenses of $111 million.
“Target is an extraordinary company. I’m excited to join the team as we work to drive U.S. traffic and sales, improve Canadian operations and accelerate Target’s digital transformation,” said Brian Cornell, Target’s new chairman and CEO. “In the coming weeks and months, I will be focused on listening and learning from Target team members in the U.S. and Canada, and working with the leadership team to develop guest-focused, strategic plans to position Target for long-run success.”
Two bright spots: Target’s digital sales, including flexible fulfillment, grew more than 30 percent in the second quarter, approximately double the industry growth rate. Additionally, Canadian segment sales increased 63.1 percent to $449 million, from $275 million last year.
Struggling with the Basics
While Target issued preliminary results in early August in a bid to temper Q2 performance expectations, analysts anticipate more bad news in the form of revised full-year estimates.
“Target continues to struggle with retailing basics – right product, right time, right place – in both its U.S. and Canadian divisions,” says Kelly Tackett, U.S. research director at Planet Retail. “After months of radio silence, management finally provided a roadmap for the Canadian turnaround, but we still lack a definitive plan to address the U.S.”
In Target’s home market, Tackett said, improving store-level execution and delivering newness and excitement in marketing and merchandising must be at the top of Cornell’s to-do list.
“Cornell also must deliver strategies for small-box expansion and omni-channel, both areas where competition is intensifying and Target remains a laggard,” she said. “One-off initiatives, such as extending operating hours in the U.S., are only a tiny part of the solution. Longer hours will boost traffic but are unlikely to deliver substantial basket size or margin improvement, as many late-night purchases will be confined to the grocery aisles.”
Although they are ultimately surmountable, Tackett says, Target’s problems with returning to comp-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.”
Target operates 1,795 stores in the United States and 130 in Canada.