Target Corp. (TGT, Financial) recently released its second quarter results with disappointing numbers that sent its shares down more than 6% to $70.63. The company lowered its annual outlook as the market remains challenged with the shift in customer preferences from brick-and-mortar retailers to online shopping. Target’s second quarter earnings declined 9.7% to $680 million. Let’s assess the giant retailer’s quarter performance and get a sense of what to expect in the upcoming quarters.
By the numbers
Target reported revenue decline of 7.2% to $16.17 billion compared with last year. The Minneapolis-based company’s EPS for the quarter stood at $1.23, way above analyst estimation of $1.13.
The retailer’s comparable store sales dropped 1.1% against 1.2% growth reported in the year ago quarter. However, digital sales went up 16% over last year and supported comparable sales from witnessing a steeper fall. In last year's second quarter, Target’s e-commerce business had registered an even stronger growth of 23%. Revenue from e-commerce contributes a small share in the total sale of the company. Target would need to record higher growth in this segment for it to have a positive impact on the overall figures, and this is critical for the company particularly as customers are increasingly opting for online buying.
Target returned $1.7 billion in dividend and share buybacks to its shareholders. However, the company made a downward revision in guidance for the second half of the year on the back of sluggish sales. During a conference call, CEO Brian Cornell said that the electronic goods segment saw weak sales, but the apparel space did fairly well.
Going forward
Target forecasts third quarter EPS to come in the range of 75 cents to 95 cents. That compares with analyst estimation of 96 cents per share. For the entire fiscal year, the company estimates EPS to come in around $4.80 to $5.20 from its earlier projection of $5.20 to $5.40. Target also expects its comparable store sales to remain flat or drop 2% in the second half of the fiscal year.
The company has been making strategic moves to manage the changing market environment. Target is not the only retailer suffering from the shifting consumer trend. Fellow players Macy’s (M, Financial), Walmart (WMT, Financial) and Nordstrom (JWN, Financial) are also witnessing the challenging business market. Consumers are buying products online rather than the traditional brick-and-mortar retailers. This was felt by Target stores as customers were flocking to e-commerce giants such as Amazon (AMZN, Financial) to meet their needs.
E-commerce is fundamentally changing consumer purchase habits as more people are finding it more convenient to buy items from the comfort of their homes. In response, Target is investing in its signature categories such as apparel, baby, kids, home décor, and wellness to draw more customers. These merchandise categories are improving faster than the company’s average and by focusing on them, Target expect to drive growth in the coming quarters.
In addition, Target is also adopting aggressive cost cutting measures. The company’s performance has slipped in recent times like other brick-and-mortar retailers. In 2015, the company had closed 133 stores in Canada. Target aims to trim $2 billion in costs in a two-year period which ends in 2016, and the company is on track to achieve the goal.
Target has been concentrating to streamline its business processes and rebuild itself to draw more customers by making it a one-stop retail solution offering groceries, fashionable apparels, cosmetics and home goods. The company plans to open small stores that will promote selective merchandise categories such as baby, kids, style and wellness.
Given the tough retail scenario, Cornell is happy with Target’s second quarter performance. He said that while the company recognizes “there are opportunities in the business, and are addressing the challenges we are facing in a difficult retail environment, we are pleased that our team delivered second quarter profitability above our expectations.” It will be interesting to see whether Target’s efforts help the company overcome the current changes to drive growth.
Disclosure: I do not hold any position in any of the stocks mentioned in this article.
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