Target (TGT, Financial), the second-largest big-box retailer in the U.S., reported second-quarter earnings that beat analyst expectations on the bottom line while revenue came in line with the market expectations.
The slightly above expected performance from the company with $73.78 billion in revenue last year didn’t do much to lift investor sentiment as the company said that it is expecting more pain ahead and revised its guidance downward.
The 112-year-old retailer is now expecting annual earnings per share for the fiscal to be in the range of $4.80 to $5.20 instead of the previously expected $5.20 to $5.40. The main reason for the downgrade is that Target is expecting its comparable sales to slow down during the rest of year, and the company expects flat growth to 2% loss during the second half of the year.
Retailers' performance was a mixed bag in the second quarter. Companies like Walmart (WMT, Financial) and Amazon (AMZN, Financial) saw sales increase across the board while Costco (COST, Financial), Target and Starbucks (SBUX, Financial) saw same-store sales continue to weaken.
U.S. retail sales
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“U.S. retail sales were unexpectedly flat in July as Americans cut back on purchases of clothing and other goods, pointing to a moderation in consumer spending that could temper expectations of an acceleration in economic growth in the third quarter.” – Reuters
An interesting shift in shopping habits
Despite U.S. retail sales staying largely positive during the first half of the year, Reuters assumes things will get better during the rest of the third quarter.
And I agree with that assessment because with every online and brick-and-mortar retailer gearing up for Black Friday and the subsequent holiday season consumers are more aware than ever that their credit will be maxed out well before January rolls around.
Interestingly, the holiday season is starting earlier each year. This is what one analyst from creditcards.com had to say:
A new survey by creditcards.com, an online resource for credit card consumers, shows that since the Labor Day holiday – the unofficial end of summer (Sept. 7, 2015) – a whopping 32 million Americans have already started checking items off their shopping lists. That’s roughly one in seven American adults, says creditcards.com analyst Matt Schulz:
“There’s a lot less pressure to buy the perfect gift when you have time to look,” said Schultz. “There’s smaller crowds, and you can even take advantage of things like layaways.” Layaways are a popular payment option offered by some stores that give consumers the ability to make smaller payments over time. This way consumers can buy pricier gifts without having to use credit or pay for it all at once, said Schultz.
So if the shopping season begins as early as September, it stands to reason that people will start their retail spending at the end of the third quarter. We may well see a flat retail growth number for August as well, or perhaps rudimentary signs of the growth to come starting in early September.
But what is Target expecting this year?
Target’s annual revenue growth has been largely flat since 2013. The company reported $73.301 billion in 2013 against $73.785 billion in 2016. But the company has an explanation for the flat growth this year.
From second quarter earnings call:
"Our second quarter comparable sales decline of 1.1% was near the middle of our guidance range for the quarter but well below the results we expect to deliver over time.
"In the second quarter, our No. 1 challenge was traffic, which affected sales in all of our merchandise categories. And consistent with the first quarter, we saw higher than normal variability in sales patterns.
"As we analyze the drivers to our second quarter performance, we have identified some company-specific challenges we are actively addressing. This includes meaningful pressure on electronics, where we saw a double-digit decline in comp sales this quarter, accounting for approximately 70 basis points of overall comp decline."Â – CNBC
But they’ve not been sitting still. By focusing on “signature categories” such as apparel and accessories, baby products, children’s products and wellness ranges, Target is trying to maximize the gains (3%) that these segments are showing when compared to other categories.
Moreover, its grocery business is also being upgraded because this is one of the moats that brick-and-mortar retailers have against encroachment by online retailers such as Amazon.
The third thing they’re trying to do is to increase the footprint of their smaller format stores in densely populated urban areas such as Chicago and Philadelphia. These areas typically show higher traffic and greater profitability, and Target is attempting to cash in on these. There are plans to open up these smaller format stores in Manhattan as well.
In a sense, Target has discovered what Walmart has with its Neighborhood Market concept.
But the problem is Target is slow with all of these initiatives. For example, it's only planned two small-format stores in Manhattan over the next 2½ years.
With the retail industry going through a crunch, time is exactly what Target doesn’t have. Nevertheless, the company has chosen the slow and steady route that befits a 112-year-old retailer. And I don’t mean that as a compliment.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
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