Few would argue that Target Corporation (NYSE:TGT) isn’t working hard to rekindle its once-impressive growth. But few would say that work is decidedly paying off. The retailer posted yet another disappointing set quarterly numbers on Wednesday morning, sending Target stock soundly lower in response.
TGT earned an operating profit of $1.23 per share for the second quarter of the current fiscal year, up a penny year-over-year. That was enough to beat Wall Street projections for $1.12 per share of Target stock, as well as its own forecasts of $1-$1.20 per share.
Revenues, however, were off about 8% to $16.17 billion, merely matching sales estimates. That came on same-store sales declines of 1.1%, which were a bit worse than the 0.9% expected.
CEO Brian Cornell commented:
“While we recognize 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. Looking ahead, we remain focused on our enterprise priorities as we continue to see the benefits of investing in Signature Categories, store experience, new flex-format stores and digital capabilities. Although we are planning for a challenging environment in the back half of the year, we believe we have the right strategy to restore traffic and sales growth over time.”
In fairness, Target really is getting its house in order. But that’s little salve to anyone whose Target stock is slumping this morning.
Target Stock and Its Headwinds
Target generally beats earnings and revenue estimates. However, it has stumbled a few times in recent quarters as company has been struggling with an identity crisis since calendar 2013. The “cheap chic” angle lost its luster versus the “fast fashion” movement employed by its apparel rivals. At the same time, e-commerce giant Amazon.com, Inc. (NASDAQ:AMZN) has continued to chip away at hard lines like toys and electronics.
Perhaps more than anything, Target never really shrugged off the 2013 hack that exposed 40 million customers’ debit card data. Revenue has been dwindling ever since, while income has been choppy at best.
Anemic profits haven’t even been as strong as suggested on the surface. The float has been whittled down from 663 million shares in 2012 to 604 million as of the end of Q1. Target bought back another 19 million shares last quarter, pulling the total float down to 585 million shares of TGT stock.
Still, Target is optimistic it can revive growth by adding product categories, beefing up its e-commerce effort and moving forward with a new kind of store.
Target’s Turnaround Effort
One of those initiatives was the expansion of its food business. While Target has long offered some groceries, in the latter half of 2015, it widened its selection to perishables such as meat and produce. The idea was to better compete with the likes of Wal-Mart Stores, Inc. (NYSE:WMT) and even dedicated grocery chains such as The Kroger Co (NYSE:KR). The effort drove growth initially, but the company has more work to do on the grocery front. This week, reports surfaced that many of perishables were expiring before they could be sold, implying a lack of grocery foot traffic and/or supply-management challenges.
As for e-commerce, Target is still playing catchup after years of not investing enough in its online venue. Digital sales were up 16% during the second quarter, which is an impressive improvement. But online sales still aren’t considered strong enough relative to the opportunity TGT has; they only make up 4% of the company’s revenue. That pace slowed from Q1’s growth rate of 23%.
To that end, however Target continues to make strides.
TGT recently hired Amazon supply chain executive Preston Mosier to serve as vice president of fulfillment operations. It will need all the help it can get on the online front. Not only was it competing head-to-head with Amazon as well as Wal-Mart, but WMT recently acquired online shopping site Jet.com. That should bolster the brick-and-mortar retailer’s online presence and threat.
Perhaps the boldest initiative the company is taking on to buoy the value of Target stock is the development of smaller stores.
The 20,000(+/-)-square-foot locales are roughly a tenth of the size of the typical Target store, allowing them to be established in, and serve, neighborhoods rather than the shopping center crowd. Twenty are already up and running, and while Walmart is getting out of the small-store business, Target recently accelerated its small-footprint plans. It now endeavors to open 14 more of the small-footprint stores before the end of 2016.
TGT: Looking Ahead
The overall assessment of Target’s overhaul efforts have been positive of late. Buckingham Research Group analysts commented earlier this week “We have been impressed with new management’s decisive actions and evidence of improved merchandising and execution, although the first quarter of fiscal 2016 was a modest setback.”
Analysts’ collective outlook affirms the sentiment. The pros were looking for an average profit of $5.13 per share, up 19% from the prior year’s second-quarter bottom line. Sales were only expected to fall 4.5% in 2016, though, from $73.8 billion to $70.5 billion.
But Target reeled in its full-year outlook. It now anticipates same-store sales will be flat to 2% lower for all of 2016, and lowered its earnings guidance from a range of $5.20 to $5.40 per share of TGT to a range of between $5.20 and $5.40. Target stock fell 4% on the downward-revised guidance.
Rival Walmart will announce its quarterly numbers on Thursday of this week.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
