Key Takeaways From Target’s Q2 Earnings
Target (NYSE: TGT) announced better than expected second quarter results, as its revenues were in line with its guidance and EPS came in ahead of expectations. However, the stock declined on account of relatively weak guidance going forward. The company’s revenue declined 7% year-over-year (y-o-y) to $16.2 billion, primarily driven by the sale of its pharmacy business to CVS, investments in promotions and increased digital shipping expenses. The retailer’s gross margin was 31.3% compared to 30.9% in Q2 2015. Target posted adjusted earnings of $1.23 per share, which was above the high end of its own guidance and also 11 cents more than analyst consensus expectations for the second quarter.
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Various Company Specific Headwinds
Target witnessed a double-digit decline in its electronics segment revenue in the second quarter, with Apple Products accounting for around a third of this. Apple shipped 40 million iPhones in Q2 2016 compared to 51 million for the same period an year ago. and its 9 million iPad unit shipments represented a decline of nearly one million year-on-year. However, Apple is expected to launch its long-awaited iPhone 7 next month, which could help boost shipments, in turn helping Target’s electronics business.
Target also witnessed soft trends in its groceries and pharmacy segments. On the other hand, comparable sales in signature categories – particularly kids, women apparel, home and toys – continue to drive the company’s results.
Growth In Digital Sales
Target’s digital sales grew by 16% y-o-y in the second quarter. Target also completed the shift to an adaptive e-commerce approach for an optimum digital shopping experience on any device. Mobile sales on the company’s flagship app increased more than 100% over last year.
Need To Stabilize Traffic
Target’s comparable sales saw a disappointing 1.1% y-o-y decline in the second quarter. The company faces a number of issues, due to which it is struggling with slow traffic. The retail sector as a whole is in midst of widespread discounting and faces slow GDP growth. Consumers have also been spending more on experiences than shopping on physical goods in recent quarters. Moreover, the company’s transactions fell 2.2% y-o-y in the second quarter, reflecting the company’s decline in traffic. To combat this situation, Target will likely focus on its high performing signature categories to differentiate itself from other retailers and shift its focus to promoting its digital channel. Going forward, Target intends to double the number of stores that ship products to online buyers and will keep increasing its mix of self check-out lanes.
Trimmed Q3 Guidance
The company lowered its expectations for the second half of the year, owing to the challenging sales and traffic environment it witnessed in previous quarters of 2016. It now expects comparable sales to be flat to down 2% in the upcoming quarter. Target also expects adjusted earnings of $0.75 to $0.95 per share in the third quarter. The company updated its full year 2016 adjusted earnings to range between $4.80 to $5.20 as compared to prior guidance of $5.20 to $5.40.
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