Target reports 62% drop in earnings, cuts profit forecast
Target Corp. slashed its profit forecast for the year as the retailer struggles with the aftershocks of a massive data breach and a botched expansion into Canada.
The Minneapolis company said reverberations from the breach, in which hackers made off with credit and debit card data from customers, cost it $148 million in its second fiscal quarter, which ended Aug. 2.
Its net income also plunged nearly 62% to $234 million, or 37 cents a share. That’s compared with $611 million, or 95 cents a share, a year earlier.
Chief Executive Brian Cornell, who took the helm at the nation’s third-largest retailer this month, said Target needed “a sense of urgency.”
“No one is happy with our current performance,” he said in a conference call Wednesday with analysts. “Our focus right now is to make sure we’ve got plans in place in the short term to improve traffic.”
Cornell said he was focusing on improving Target’s online performance and attracting shoppers back into stores.
A former PepsiCo Inc. executive, Cornell stepped in months after longtime Chief Executive Gregg Steinhafel resigned in May. He was one of several high-ranking executives who departed in the wake of the hacking incident during the last holiday season.
On top of the data breach costs — which Target said were partially offset by $38 million in insurance payouts — the retailer wrestled with weak U.S. sales. Sales at stores open at least a year were flat in its second quarter. When new stores were added to the mix, U.S. sales climbed only 0.7%.
The company lowered its annual earnings forecast to a range of $3.10 to $3.30 a share. That’s down from its previous guidance of $3.60 to $3.90.
Analysts said Target will have to slash prices even more aggressively to woo hesitant shoppers as it heads into the crucial holiday season, especially as consumers have continued watching their spending carefully.
Last week, Wal-Mart Stores Inc. dropped its annual profit forecast after seeing yet another disappointing quarter. Macy’s Inc. also reported lower-than-expected earnings and reduced its sales forecast for the year. Even companies that own brands popular with shoppers at the moment, such as Kate Spade & Co. and Michael Kors Holdings, have discounted merchandise to unload some products.
Shoppers who normally like to splurge during the summer months are still being frugal despite good weather and a general uptick in the job market, analysts said. The Commerce Department reported last week that retail spending in July was flat.
“Prospects for the second half of the year are one of an uphill battle,” said Ken Perkins of Retail Metrics Inc. “Target is going to need to be promotional. I think that is here to stay for most retailers.”
Aside from the data breach, Target is also grappling with a host of other problems contributing to its stagnant sales, observers said.
The retailer has lost much of its once-envied reputation for offering stylish clothing and accessories at affordable prices, said Britt Beemer, chairman of America’s Research Group. That cachet even inspired devoted shoppers to nickname the company “Tarjay,” or Target pronounced with a faux French accent.
“The apparel is not as trendy today as it was two or three years ago,” he said. “Target was hot because apparel was selling through the roof.”
Target’s effort to expand its grocery offerings to encourage consumers to shop more regularly has also not been as gangbusters as anticipated, analysts said.
“There is so much competition in that space, it’s very hard to compete on anything except price,” Perkins said. Target “was playing catch-up.”
The company also stumbled with its aggressive push into the Canadian market. Observers said the retailer opened too many stores and had logistical problems keeping the stores stocked with key products.
On Wednesday, Cornell said he just got back from visiting Target’s operations in Canada and getting a firsthand update on its strategy review.
“The Canadian team is making broad changes as they focus on improving performance in time for the key holiday season,” he said.
There were some bright spots amid the gloomy news.
Target said sales were improving. In July, sales at U.S. stores open at least a year rose more than 1%, driven in part by promising back-to-school results.
Wall Street shrugged off the poor earnings report, pushing shares of Target up $1.08, or 1.8%, to $60.33.
Other retailers had already “set the tone that things were tough,” Perkins said. “Potentially the Street was looking for even worse news.”
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