Target (TGT, Financial) recently released not-so-impressive results for the second quarter. The results were disappointing. Target’s earnings saw a big decline. The company also posted a weak forecast on the back of the data breach issue. But management thinks that the company has some growth drivers that can improve its performance in the future. Let us have a look at some of the constructive moves that Target is undertaking to gain lost ground.
Results and outlook
In the recently reported second quarter, Target saw a decline in its earnings by a big margin. Its adjusted earnings per share saw a 20.6% fall. The company posted EPS of $0.78 per share as compared to $0.98 per share as compared to 2013. On the other hand the sales of the company did increase by 1.7% which was in line with the Street’s estimates. Also, the company posted net income of $234 million.
The earnings decline didn't impress investors as the company’s shares nosedived. Moreover, Target is seeing weakness in its business on the back of a couple of other points. The fallout from last year’s data breach, which forced it to cut its annual profit outlook, is still troubling Target.
Target is going from bad to worse. It is still struggling with last year’s hit when hackers acquired credit and debit card numbers from its systems. In order to deal with this Target has already spent $100 million and it is spending another $100 million to roll out more secure chip-and-pin credit cards. This will put again put pressure on Target’s margin leading to weak financial performance in future.
In order to get over this weakness Target is also taking some concrete steps which it thinks will help it to gain its lost ground back. Target finds itself increasingly forced to “Ultra Value” strategy in order to woo back its lost customers. To make this more attractive, Target is forced to offer its products at lower prices. This will attract more customers as they will find the prices and selections better than Target's peers. This will increase Target’s sales, also putting pressure on its profit margins.
Not an easy comeback
Things are not so easy and smooth for Target. It is facing stiff competition from its rivals such as Amazon.com (AMZN, Financial), internet stores and other ultra-bargain shops. In the past also Target’s strategy of Rich Man’ Wal-Mart couldn’t survive as the company wasn’t competitive enough to face multiple competitive threats.
The changing consumer shopping attitude is also making things worse for Target. The consumers are increasingly looking for lower-priced products so they are turning more to cheaper stores such as Dollar Store and Family Dollar Inc (FDO, Financial).
Moving forward, Target is seeing some early of progress with its efforts to improve results in the U.S and Canada. Target is now leaning heavily on promotion and consumer environment. Target is pleased with the success of its schemes such as back-to-school and back-to-college. Target predicts that the consumer trends are improving as during this season; the guests were focused on the occasion rather than promotion.
Further, to hold its presence in the digital environment, the company has launched a new ad campaign which is focused on the millenials which aims at expanding the brand perception of Target from brick-and-mortar destination to a total retailer experience. In Canada also Target is adding more newness to its stores and it is adding more exclusive items to strengthen its product portfolio.
Target is also excited about its upcoming designer partnership with Altuzarra. This partnership will enhance its offering in all of the Target stores and Target.com in the U.S and Canada. Also, Target is also trying to improve the guest experience, and it is also working on extending the personalization to more guest experiences, which includes product content and offers in the future. In order to drive additional traffic and conversion, Target is also adding further mobile enhancement. With all this, Target thinks that the traffic trends are recovering and monthly sales are improving. Also, the company is making some important changes in its operations and merchandise assortment to deliver improved results by this holiday season.
Conclusion
The fundamentals of Target are also impressive. The stock stands cheap with a trailing P/E of 26.67 and the earnings growth is confirmed by a good forward P/E of 16.53. The dividend of the company also makes Target a better investment option. Considering all these facts, investors should definitely include Target in their portfolio.
