Target Reports Second Straight Quarter of Comp Sales Decline

Retailer’s revenue fell 6.7% to $16.4 billion from $17.6 billion in the year-ago period

t1Upscale discount retailer Target Corporation (NYSE: TGT) announced its Q3 FY16 financial results on November 16th, 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.

Q3 FY16 financial highlights

t2Target is the latest traditional brick-and-mortar chain to report declining sales as a result of food deflation and intense competition from online merchants like Amazon.com Inc. (NASDAQ: AMZN). During Q3 FY16, revenue fell 6.7% to $16.4 billion from $17.6 billion in 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. During the reporting quarter, stores accounted for 96.5% of total sales, while digital channels accounted for 3.5%.

Continuing with the trend seen in Q2 FY16, Target’s Q3 FY16 comparable sales dropped 0.2%. The company’s same-store sales snapped a two-year winning streak in Q2 FY16, as it struggled to lure shoppers, particularly on smaller “fill-in” trips that potentially lead to repeat visits. On the bright side, comparable digital channel sales grew 26% and contributed 0.7% to comparable sales growth. Target continued to gain market share in key signature categories (baby, style, kids, and wellness) and saw unexpectedly strong sales in the back-to-school and back-to-college season.

During the holiday period, Target will once again lean on its blanket free shipping offer to drive sales. This promotion eliminates the minimum spending threshold shoppers typically need to meet to receive their online orders for free. Target also upped its advertising spend by 20% for the peak holiday season, and will also ramp up its exclusive toy offerings by 15% to 1,800.

Target is also overhauling the grocery department to include more specialty and organic items. Target has partnered with Instacart, an app-based retail delivery service, in three markets and the retailer also allows customers to select an Order Pickup option for packaged food items, or non-perishables. Instacart has also partnered with several other major retailers including Whole Foods Market Inc. (NASDAQ: WFM) and Costco Wholesale Corp. (NASDAQ: COST) for same-day grocery deliveries ordered online.

To 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, 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) grew 9.9% to $1,057 million in Q3 FY16 from $962 million in the year-ago comparable period. EBITDA margin was at 9.9% and EBIT margin was at 6.4% versus 8.6% and 5.5%, respectively, in the year ago same period. Target’s gross margin rate inched up to 30.2% compared to 29.4% in the year-ago same 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.

During the reporting quarter, Target’s SG&A expense rate was lower at 20.3% compared to 20.7% in the year-ago comparable period, reflecting continued expense discipline across the organization. The Company’s net interest expense was at $142 million versus $151 million in the year-ago comparable quarter.

In all, Target’s net profit grew 10.7% to $608 million from $549 million in the same period a year ago. GAAP EPS from continuing operations jumped 21.1% to $1.07, while adjusted EPS came in lower at $1.04 a share.

Other highlights

Job cuts: 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 FY16.

t3Share repurchase and dividend: Target returned $1.2 billion to shareholders in Q3 FY16 through dividends and share repurchases. The Company repurchased 8.1 million shares of common stock at an average price of $69.73 for $878 million, while paying dividends of $345 million.

In September 2016, Target’s Board of Directors authorized a new $5 billion share repurchase program. Repurchases through this program will begin upon completion of the prior $10 billion program. At the end of Q3 FY16, including the $314 million investment in the accelerated share repurchase program, $300 million of capacity remained under the prior program.

Guidance for Q4 FY16 and full year FY16

For Q4 FY16, Target raised its expectations for comparable sales and now expects comp sales to grow 1%, or fall 1%, compared to prior guidance of a 2% fall to flat. Target also expects both GAAP EPS from continuing operations and adjusted EPS of $1.55 to $1.75.

For full-year 2016, Target expects GAAP EPS from continuing operations of $4.67 to $4.87, compared to prior guidance of $4.36 to 4.76. The Company expects full-year 2016 adjusted EPS of $5.10 to $5.30 compared to prior guidance of $4.80 to $5.20. The $0.43 difference between these ranges reflects early debt-retirement losses and a small benefit from the resolution of income tax matters.

Stock Performance

t4Target’s stock ended the day at $76.97, gaining 0.26%, at the close on Wednesday, December 07th, 2016, having vacillated between an intraday high of $77.18 and a low of $76.10 during the session. The stock’s trading volume was at 6,790,991 for the day. The Company’s market cap was at $43.17 billion as of Wednesday’s close.

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