Consumer spending in the U.S. jumped to $94 in July from $91 in June. This shows that people are willing to spend, and the retail industry should get some relief. But this does not seem to be the case, especially with the big box retailers such as Target (TGT, Financial) and Wal-Mart (WMT, Financial). These retailers are finding it difficult to attract customers and make them buy their products. Also, they face stiff competition from dollar stores, which offer products at a lower price.
Target reported its second quarter results quite recently, wherein its numbers were mixed and did not give much to investors to be happy about. Let us dig in deeper.
Mistakes galore
Despite efforts such as ramped-up promotions and huge discounts, revenue rose slightly to $17.4 billion. However, it did meet the estimate of $17.38 billion. Lower store traffic and a decrease in the transaction size resulted in a decline of 1.3% in the transaction size at the existing stores.
Target was not the only one to witness falling sales, especially in the U.S. Demand in the U.S. has been weak for quite some time now, and players such as Wal-Mart, which have a larger presence, have also felt the pinch. Even Wal-Mart reported no change in its same-store sales metric and is finding it difficult to stir demand. In fact, it has lowered its outlook for the year as it expects lower sales in the coming months.
Another problem faced by Target was the one related to the data breach during the holiday season. The data breach resulted in huge costs, which hampered its bottom line. Also, it scared away many customers during the peak season, leading to lower sales. However, the company is taking measures to overcome the situation.
Further, its earnings dropped significantly. After adjusting for one-time costs, earnings dropped 20.6% to $0.78 per share, over the previous year. Gross margin also fell to 30.4% from 31.4% last year.
A major cause of concern
A key cause of concern for the retailer is its expansion in Canada. Sales in Canada have been sluggish, and it has been experiencing losses. However, it is expected to return to profit by next year. It is facing competition from the local players in the region, which offer better deals and customers are loyal to them.
But Target, too, is determined to make this business profitable. It is making a number of efforts to overcome competition. It will be introducing 30 new products in the coming months, across 130 stores in Canada. Also, it has partnered with celebrities to lure customers and boost sales. It has also improved its inventory and store displays. This is because the company had not stocked its shelves well when it opened new stores in the region.
However, Target is still cautious about its future and has lowered its guidance for the year. It now expects to earn $3.10 to $3.30 per share, lower than its previous estimate of $3.60 to $3.90 per share.
Final words
The retailer is indeed going through a tough phase, wherein a number of mistakes resulted in lower sales and losses for the company. However, it seems to be making its way out of each of them. Its initiatives for Canada and efforts for overcoming the after effects of data breach should help in growing. However, it is not the right time to enter into this company. Hence, investors should wait for the right time to take positions.
