Target cuts its sales forecast, citing 'difficult retail environment'

August 17, 2016

Target Corp. cut its annual forecast after the retail chain’s sales slumped last quarter, hit by what CEO Brian Cornell described as a “difficult retail environment.”

The company now expects adjusted earnings of $4.80 to $5.20 a share, compared with an earlier forecast of as much as $5.40. Target also trimmed its projections for sales in the second half of the year, blaming sluggish demand. The shares tumbled as much as 7.2 percent in the wake of the results.

Target has 11 stores in the Indianapolis area and 32 in Indiana.

The dour outlook renews concern that the retail economy is sliding into a deeper funk. While Cornell has been cutting costs to bolster profit—a strategy that helped earnings beat analysts’ estimates last quarter—the company seems less confident the approach will work in the second half. Slow technology sales and the transfer of its pharmacy operations to CVS Health Corp. have added to the challenges.

“It is a very cautious consumer—if we look at overall trends,” Cornell,  a former PepsiCo Inc. executive who took the CEO job in 2014, said on a conference call. “But that isn’t an excuse for us.”

The stock fell as low as $70.02 in New York trading, the biggest intraday decline since May. It had been up 4 percent this year through Tuesday’s close.

Target's customer traffic fell for the first time in a year and a half. The company attributed that to it falling short on the "Pay Less" position, turning off shoppers looking for essentials like detergent or basic T-shirts.

Target also cited issues in the quarter that were both company-specific and industrywide. They ranged from a lack of new products in its electronics area to disappointing business in perishables like fruits and vegetables and disruptions caused by its sale of its pharmacy business to CVS. The deal was completed in December of 2015.

Target also saw a wide variability in sales by markets, noting weakness on the East Coast but pockets of strength in parts of California.

Cornell had warned investors in May that sales could be down as much as 2 percent in the second quarter, blaming weather and slowing consumer demand.
Second Half

Target’s same-store sales ultimately fell 1.1 percent in the period, the company said on Wednesday. Analysts had predicted a 1 percent drop in sales, according to Consensus Metrix. The company hadn’t posted negative same-store sales since the first quarter of 2014, when it was recovering from a high-profile hacker attack. In third and fourth quarters of this year, the company now expects sales to range from flat to down as much as 2 percent.

Keeping a lid on expenses helped Target post $1.23 a share in earnings for the second quarter, which ended July 30. Analysts had estimated $1.13.

Cornell is trying to refocus the retailer on its key strengths, such as fashion, children's and home decor, to help drive traffic. Its grocery and electronics categories, meanwhile, have struggled. Sales of Apple Inc. were down more than 20 percent last quarter, the company said.

Target also is offloading its in-store pharmacies to CVS, a transition that has hurt customer traffic. The company said it’s working with the drugstore giant to win back those shoppers.

Investors have been bracing for a retail downturn, but other results haven’t been as bad as some had feared. Home Depot Inc. said this week that its latest quarterly profit rose 9.3 percent, helped by Americans continuing to invest in the homes. Department stores Macy’s Inc. and J.C. Penney Co. also posted better-than-expected numbers.

“Although we are planning for a challenging environment in the back half of the year, we believe we have the right strategy to restore traffic and sales growth over time,” Cornell said.


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