Target Reports First Comp Sales Decline in Two Years

Retailer’s revenue fell 7.2% to $16.2 billion from $17.4 billion during Q2 FY16

t1Upscale discount retailer Target Corporation (NYSE: TGT) announced its Q2 FY16 financial results on August 17th, 2016.

The Minneapolis, Minnesota-headquartered Company provides high-quality, on-trend merchandise at attractive prices in spacious and guest-friendly stores. It offers household essentials, electronics, apparel, jewelry, food and pet supplies, home furnishings and décor, home improvement, and automotive products, as well as seasonal merchandise. In addition, it offers in-store amenities, including Target Café, Target Photo, Target Optical, Portrait Studio, Starbucks, and other food service offerings. Target sells products through its stores; and digital channels, including Target.com.

Target operates 1,795 stores and 38 distribution centers in the U.S. Read more about Target’s financial results below.

Q2 FY16 financial highlights

Source: Target
Source: Target

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). Revenue fell 7.2% to $16.2 billion from $17.4 billion from the same period a year ago when pharmacy sales were still included in Target’s results. Target sold its pharmacy business to CVS Health Corp. (NYSE: CVS) for $1.9 billion in June 2015. Target’s sales at existing stores dropped 1.1%, its first such decline since Q1 FY14. On the bright side, comparable digital channel sales grew 16% and contributed 0.5 percentage points to comparable sales growth. However, online sales were lower than the 23% growth in Q1 FY16 and 34% growth in Q4 FY15. Moreover, sales of Apple Inc.’s (NASDAQ: AAPL) products plunged more than 20% during the reporting quarter. Comp sales growth in Signature Categories outpaced total comp sales by 3 percentage points.

Source: Target
Source: Target

More challenging for Target is the 2.2% drop in traffic during Q2 FY16, despite the Company overhauling the grocery department to include more specialty and organic items and rolling out new offerings such as the in-house Cat & Jack kids clothing line. t4To reinvigorate sales, Target has been focused on streamlining operations and revamping itself as a one-stop shop retailer, a place where customers can pick up groceries, high-end cosmetics, and exclusive apparel and home goods. 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 is testing flexible format smaller stores to prioritize certain merchandise categories that could drive sales in the near term.

Target’s segment earnings before interest expense and income taxes (EBIT) fell 8.1% to $1,241 million in Q2 FY16 from $1,350 million in the year-ago period. EBITDA margin was at 11.2% and EBIT margin was at 7.7% versus 10.9% and 7.7%, respectively, in the year-ago period. Target’s gross margin rate inched up to 31.3% compared to 30.9% in the year-ago period, benefitted by the sale of the Company’s pharmacy and clinic businesses and ongoing cost savings initiatives, partially offset by investments in promotions and higher digital shipping costs. The Company’s net interest expense was at $307 million versus $148 million in the comparable year-ago quarter, due to a $161 million charge related to the early retirement of debt.

As a result of lower revenue and higher expenses, Target’s net profit dropped 9.7% to $680 million, down from $753 million in the same period a year ago. GAAP EPS from continuing operations fell 11.6% to $1.07, while adjusted EPS came in higher at $1.23 a share.

Target’s Q2 FY16 net earnings from discontinued operations were $55 million, and reflect tax benefits from investment losses in Canada recognized upon court approval of Target Canada’s liquidation plan.

Other highlights

t5Job cuts: Like other retailers, Target’s financial performance has slipped in recent months as it combats online retailers, particularly Amazon. In 2015, Target shut down all 133 stores in Canada, laying-off its entire Canadian workforce. In March 2015, the Company announced plans to cut another 1,700 jobs. Target is seeking to save $2 billion in costs over two years ending in 2016.

Store upgrades: In August 2016, Target said that the Company is investing $20 million to add single-stall bathrooms at all of its stores where that option is not available. The company already had single-stall bathrooms that anyone can use at about 1,400 of its 1,800 stores.

t6Share repurchase and dividend

Target returned $1.7 billion to shareholders in Q2 FY16 through dividends and share repurchases. The Company repurchased 19 million shares of common stock at an average price of $70.91 for $1,350 million, while paying dividends of $330 million.

Guidance for Q3 FY16 and full year FY16

For Q3 and Q4 FY16, Target expects Y-o-Y same-store sales change in the range of -2% to 0%. For Q3 FY16, adjusted EPS is forecasted to be in the range of $0.75 to $0.95.

For full-year FY16, Target expects GAAP EPS from continuing operations of $4.36 to $4.76 compared to prior guidance of $4.76 to $4.96. The Company expects adjusted EPS of $4.80 to $5.20 compared to prior guidance of $5.20 to $5.40.

Stock Performance

t7Target’s stock ended the day at $71.05, gaining 0.94%, at the close on Tuesday, August 23rd, 2016, having vacillated between an intraday high of $71.50 and a low of $70.59 during the session. The stock’s trading volume was at 5,620,144 for the day. The Company’s market cap was at $41.98 billion as of Tuesday’s close.

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