MINNEAPOLIS — Target’s U.S. sales held up reasonably well in second-quarter 2014, but weak results in Canada and expense pressures prompted the company to reduce its full-year profit expectations a week after Brian Cornell became president and CEO.
Target said sales at its 1,795 unit U.S. stores division increased 0.7% to $17 billion, adding that same-store sales were flat. A 1.3% decline in transaction volume was offset by a corresponding 1.3% increase in transaction size. To realize those sales, Target increased promotional activity, which eroded margins and contributed to an operating profit decline of 12.8% to $1.2 billion.
Much of the company’s promotional efforts are geared toward holders of its REDcard branded credit and debit cards who receive a 5% discount on most purchases. The penetration rate of those products increased to 20.8% of second quarter sales compared to 18.7% the prior year, a noteworthy increase considering users of the REDcard products were targeted in a data breach last December.
Target experienced a more challenging sales and profit situation at its upstart Canadian division. Sales at the 130 unit Canadian division increased 63.1% to $449 million as new stores were added. However, the company said same store sales declined 11.4% at the 48 stores which became eligible for same store sales reporting purposes for the first time.
“The second-quarter decline in comparable sales reflects the comparison to strong grand opening sales surges in 2013, combined with the impact of market densification later in 2013 which redistributed sales from earlier store openings,” Target said in a statement.
Operating profits in Canada declined 20.8% to a $208 million second quarter loss compared to a $169 million loss the prior year.
To offer perspective on the results, new CEO Cornell deferred to CFO John Mulligan who had been acting as interim CEO since Gregg Steinhafel resigned as chairman, president and CEO in early May.
"While results from the quarter didn’t meet our expectations, we are seeing some early signs of progress as we work to improve results in the U.S. and Canada,” Mulligan said. “In the U.S., traffic trends continue to recover and monthly sales are improving, with July comparable sales up more than 1%. Better U.S. sales have continued into August, driven by early back-to-school results. In Canada, the team is making important changes to operations and the merchandise assortment with a focus on delivering improved results by this holiday season.”
Cornell said Target is an extraordinary company and he is excited to join the team focused on driving U.S. traffic and sales, improving Canadian operations and accelerating Target’s digital transformation.
“In the coming weeks and months I will be focused on listening and learning from Target team members in the U.S. and Canada, and working with the leadership team to develop guest-focused, strategic plans to position Target for long-run success,” Cornell said.
To manage investor expectations regarding the pace at which those strategic plans yield results, Target substantially reduced its full year profit forecast. The company said it expects earnings per share adjusted to exclude non-recurring expenses in a range of $3.10 to $3.30 compared to earlier guidance of $3.60 to $3.90. In the second quarter, Target’s adjusted earnings per share declined 20.6% to 78 cents from 98 cents the prior year.