Disappointing sales attributed to competition from online stores and weaker demand
Target Corp. (NYSE: TGT) announced its Q1 FY2016 on May 18th, 2016. The Company recorded sales decline of 5.4% to $16.2 billion from $17.1 billion seen in the comparable period last year. A 1.2% increase in comparable sales was more than offset by the impact of the sales of the pharmacy and clinic businesses. The lower-than-expected increase in quarterly sales was attributed to unseasonable weather and weaker demand for electronics and groceries.
Traditional model gives way to new store concepts
Target is the latest traditional brick-and-mortar chain to report declining sales as a result of intense competition from online merchants like Amazon.com Inc. (NASDAQ: AMZN). Moreover, slowly rising wages enable consumers to spend more on big-ticket purchases like cars and home improvements. The Company is now focusing on testing new store concepts and online strategies to grab market share from online merchants like Amazon and fast-expanding dollar store chains. With the price gap steadily decreasing between Target and its competitors such as Wal-Mart Stores Inc. (NYSE: WMT), Costco Wholesale Corp. (NASDAQ: COST), The Kroger Co. (NYSE: KR), and Best Buy Co. Inc. (NYSE: BBY), the Company has focused on launching smaller concept stores to pull in customers.
On a conference call on May 18th 2016, Chief Executive Officer Brian Cornell said, “We’re approaching our business with appropriate caution as sales trends at Target and many of our key competitors (have) weakened”.
Target said apparel sales rose during Q1 and were stronger than other retailers’, but unseasonable weather hurt demand. In addition, the Company’s grocery division suffered from a reorganization that increased organic and fresh food offerings, but made it harder for customers to find products. Digital sales increased 23%, compared with a year-earlier rise of 38%, and accounted for 3.5% of the company’s total.
Net income fell to $632 million from $635 million a year ago. Excluding restructuring charges and gains from the CVS deal, earnings were $1.29 per share, better than analysts’ expectations of $1.20 per share.
Consequent to Target missing estimates on both sales and profits, shares of the Company fell as much as 11%, their biggest intraday decline since December 2008.
On a positive note, comparable digital channel sales grew 23% and contributed 0.6 percentage points to comparable sales growth. First quarter comparable sales in signature categories (Style, Baby, Kids and Wellness) grew more than three times as fast as the company average. Segment earnings before interest expense and income taxes (EBIT) were $1,323 million in Q1, an increase of 4.9% from $1,261 million in the year-ago period. Q1 marked Target’s sixth consecutive quarter of traffic growth, reflecting increases in both stores and digital channels, according to the company release.
Q2 Earnings Guidance
Target said Q2 comparable sales would be flat to down 2% while remaining confident that it would meet its earnings outlook of $1.00-$1.20 per share before special items. Second quarter GAAP EPS from continuing operations will include approximately $0.17 of expense related to early debt retirement losses, and may include the impact of certain additional discrete items that will be excluded in calculating adjusted EPS. While Q2 guidance may be impacted by the recent slowdown in consumer trends, Target believes that it could achieve full-year adjusted EPS within its prior guidance range.