America’s second largest retailer Target Corp. (TGT, Financial) reported its earnings on August 20 and despite meeting the street’s revenue expectations, the numbers were not up to scratch. CFO, John Mulligan stated during the earnings call – “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”.
Does it mean that the bright days are returning for the retailer suffering from the after-effect of last year’s data breach incident? Let’s plunge in to find out what the key takeaways from the earnings are, and whether it holds promise for Target’s investors.
Revenue positively affected by U.S. retail and digital sales
Target’s store sales rose 1.7% to $17.41 billion from the year ago period, driven by improvement in U.S. new store sales while U.S. comparable sales remained flat. During the second quarter, U.S. sales grew 0.7% to $17 billion from $16.8 billion reported last year. The revenue also met the Wall Street prediction of $17.39 billion for the quarter.
Though the number of U.S. segment transactions edged down 1.3% this quarter, the average transaction amount climbed 1.3%. Retail store sales in the U.S. are gradually gaining momentum with the July comparable sales up more than 1% from the year-ago period. This growth is eminent this month as well in the U.S. when back-to-school shopping is on the high. Target’s catch-up game with Wal-Mart (WMT, Financial) with respect to pricing seems to be working, as it is trying to win back the customer confidence by keeping prices comparatively lower.
Also, Target has been shifting its focus to digital sales which represent about 2.5% of the company’s total sales. Though in this online-shopping era this paltry contribution looks as a negative point for Target, yet it has possibility to turn into a key revenue driver. During the three months period, digital sales went up by a whopping 30%, thus having a favorable effect on the company’s overall revenue.
Canada operations bound to improve
Target has been struggling to improve its sales in Canada since the third quarter of last year. Hence, the team has been going through operational changes with extra emphasis being laid on merchandise assortment for delivering improved results.
The 48 new stores opened in Canada “became mature at various points during the quarter” and led to Canadian sales increase by 63.1% to $449 million from $275 million reported in the same quarter of last year. However, this was partially offset by an 11.4% decline in comparable sales in the geography. Target blames this drop to the gala-opening events witnessed in new stores last year that generated huge traffic which is hard to match this year.
According to new CEO, Brian Cornell, Target will begin to match its rival’s prices in Canada and improve its supply chain to impress customers in Canada for improving footfalls and thus increasing its comparable sales.
Earnings take a beating
Though continuous promotions and discounts on prices has aided in pulling up sales for Target in the quarter, all this has taken a toll on the earnings as operating margins have plunged. Besides the 3.2% jump in general expenses, there was 11.9% increase in depreciation and amortization charges, and the net interest expense also grew phenomenally, by 164%. These costs directly affected the net income for the quarter that plunged 61.7% to $234 million from $611 million reported in the comparable quarter last year.
Also, earnings per share fell to $0.37 per share from $0.96 per share in the year ago, considering the impact of the data breach costs which are being accrued since last December. Barring such costs, the earnings stood at $0.78 per share this quarter, missing analysts’ expectations of $0.80 per share.
Considering the promotional war Target wages with Wal-Mart for alluring low and middle income shoppers to its stores, the management now expects the earnings per share of $3.10-$3.30 per share from the range of $3.60-$3.90 predicted earlier.
Investors gifted with the cherry
Irrespective of the earnings plunge, the investors were gifted with dividends and share repurchase program – something that delighted the investors’ and oozed their tension linked to staying invested with Target Corp.
In the quarter, Target paid dividends worth $272 million, an 18% increase from $231 million of last year. Also, in June this year, the management increased the quarterly dividend by 21%, from $0.43 per share to $0.52 per share. Target bought back 614,000 shares of its common stock during the second quarter, as well.
Rounding up
Target’s second quarter was disappointing for its management as the improvement signs were not that prominent. However, as promotional offers are at their peak, revenues should remain decent in the near future. Also, the management has taken a cautious stand with respect to earnings by lowering their earnings guidance for the fiscal year. But the bright side of the story is linked to investor returns which remain the chief priority for the retail giant. Target is hoping to reinforce the customer confidence it has recently lost. Let’s stay tuned to keep watching the company’s forthcoming moves.
