Target Earnings: Continued Struggle In The U.S. And Canada Calls For Proactive Actions

Cheap chic retailer Target (NYSE:TGT) recently released its Q1 fiscal 2014 results with 2.1% growth in overall revenues, in line with market expectations. However, the retailer’s profits stumbled by almost 16% due to heavy losses in Canada and high expenses related to the data breach incident. During the quarter, Target’s losses in Canada clocked up to $211 million and it incurred $26 million in breach related expenses, excluding the $8 million insurance covered. The company earned $0.66 per share in Q1 fiscal 2014, while analysts had expected the figure to be around $0.71. Following these results, Target slashed its EPS guidance for the full year citing low control over breach related expenses and towering Canadian losses as the reason. The retailer now expects its fiscal 2014 EPS to be between $3.60-$3.90, which is well below the consensus estimate of $3.99 and its earlier guidance of $3.86-$4.15. ^[1]

Just a day before its earnings release, Target severed its Canadian operations president, Tony Fisher, in the wake of its disastrous performance in the region. Mr Fisher was immediately replaced by U.S. senior vice president of merchandising operations Mark Schindele. The company stated that it will also hire a non-executive chair to assist Mr. Schindele in reinstating Target’s debut outside the U.S. ^[2] In the U.S., the retailer reported improvement in store traffic after being mauled by the massive data breach. Yet, the recovery isn’t strong enough to pull Target’s growth out of the slump. In fact, the retailer’s recent struggle with the breach has shed light on its deteriorating brand image in the U.S. Target was once known for its affordable hot fashion products and home accessories, but it appears to have lost its essence lately, due to a shift of focus towards groceries that still remains a small business for the company.

Our price estimate for Target stands at $70, implying a premium of over 20% to the market price. However, we are in the process of updating our model in light of the recent earnings release.See our complete analysis for Target

Routed Canadian Segment Gets A New Leader

While Target entered Canada with high hopes last year, its first year of operation was abysmal as it rendered only $1.3 billion in revenues and clocked up $941 million losses. In Q1 this year, although the segment’s revenues increased to $393 million (127 stores) from $86 million (24 stores) in the same quarter last year, they remained below the company’s own projection of  $400 million. ^[3] Moreover, the retailer’s revenue per store was 15% lower in this quarter than what it was in Q1 fiscal 2013. While the company had expected better performance from Canadian stores this year, persistent problems of inventory and pricing kept its results subdued. As a result, Target now expects its Canadian segment to generate only $2 billion in revenues in 2014, which is $600 million below its earlier forecast. ^[3]

Considering its dismal performance, Target recently replaced its Canadian president with an experienced veteran from its U.S. team. The new president, Mike Schindele, has been with Target for 15 years and was holding the position of U.S. senior vice president of merchandising operations before he was appointed as the president. In addition, the company plans to hire a non-executive chair of Canadian descent with significant business experience in the region. The yet to be named non-executive chair will help the new president in formulating some relevant strategies to improve customer sentiment towards the company. The main problem for Target in Canada has been low customer satisfaction that resulted from poor inventory management and expensive products. The company was very aggressive in opening stores without a sturdy supply chain to support its needs. The retailer offered expensive products for Canadian consumers who are highly value conscious and very fond of cross border shopping. We believe that the new management should slow down store expansion in the region and focus on developing a strong supply chain instead.

Problems In The U.S. Run Deeper Than Data Breach

During the first quarter, Target’s comparable store sales in the U.S. fell by 0.3% with 2.3% decline in store traffic. Although most of it can be attributed to weak consumer sentiment towards the company on account of a data breach incident, the retailer’s problems run much deeper. Encouraged by Wal-Mart‘s (NYSE:WMT) success, Target has enhanced its focus on groceries to make its business more resilient to economic headwinds. While this move makes sense, shifting focus from its core value proposition is proving costly for the retailer. Due to the highly competitive environment in the U.S. and Target’s perseverance with groceries, its cheap chic brand image has lost some of its luster.

The recent departure of Target’s CEO, president and chairman, Gregg Steinhafel, indicates desperate efforts undertaken by the management for the revival for the company. Interim CEO, John Mulligan, stated that while they are looking for a new CEO, he and others will be prompt in implementing necessary strategies. To win customers back after the data breach, Target has been offering some of the biggest discounts of the last 10 years. It plans to offer such deals throughout the year, which although will weigh on its margins, should help it drive store traffic and mend customer sentiment towards the company. ^[3]

Target recently launched its year long Run marketing campaign that features national as well as private brands of categories including food, baby, personal care, paper, pets etc. The retailer stated that this campaign will be renewed every season and will be in sync with various annual events. The main idea behind this campaign is to attract customers who prefer local grocery or drug stores over big-box outlets. ^[4] In addition to its ongoing efforts, Target needs to come up with some influential strategies to regain its footing in the affordable fashion market. The company does offer exclusive and limited edition products from time-to-time, but lately they haven’t been enough to garner customer attention. We believe that the new management can come up with some pertinent initiatives, that can help Target bolster its core value proposition and recover in the near future.

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1. Still Hurt By Data Breach And Losses In Canada, Target Lowers Forecast, The New York Times, May 21 2014 [↩]
2. Target Announces U.S. And Canada Leadership Changes To Drive Company’s Transformation, Target Ca, May 20 2014 [↩]
3. Target Results Hurt By Canada, Data Breach, The Wall Street Journal, May 21 2014 [↩] [↩] [↩]
4. Target’s Q1 fiscal 2014 earnings transcript, May 21 2014 [↩]