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Target Earnings Drop

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Amidst sluggish economic environment, cautious consumer spending and intense competition, Target Corporation (TGT - Free Report) , the operator of general merchandise and food discount stores in the United States, posted second-quarter fiscal 2013 results. The quarterly earnings including U.S. and Canadian operations came in at 95 cents a share that dipped 10.4% from $1.06 reported in the prior-year quarter.

Target’s adjusted earnings of $1.19 per share increased 6.1% from $1.12 delivered in the year-ago quarter. This relates to results from U.S. operations only. Analysts polled by Zacks had projected earnings of 97 cents per share for the quarter.

The quarter reflects disciplined cost management and effective execution of strategy, offset by lower-than-anticipated U.S. comparable-store sales.

Let’s Unveil the Picture

Total revenue climbed 2% to $17,117 million from the prior-year quarter but fell short of the Zacks Consensus Estimate of $17,357 million. Sales for the U.S. segment, which now comprise of U.S. Retail and U.S. Credit Card segments after the sale of U.S. credit card portfolio in Mar 2013, came in at $16,841 million and rose by 2.4%.  

Minneapolis-based Target said that comparable-store sales for the quarter inched up 1.2% compared with 3.1% increase registered in the prior-year quarter. The number of transactions edged down 1.4%, however, the average transaction amount climbed 2.7% in the quarter.

Gross profit at the U.S. segment jumped 2.5% to $5,285 million, whereas gross margin expanded 10 basis points to 31.4%. Segment operating income rose 0.4% to $1,330 million, whereas operating margin contracted 10 basis points to 7.9%.

Target’s credit card penetration increased 160 basis points to 9.3%, whereas debit card penetration expanded 430 basis points to 9.4% during the quarter. Total store REDcard penetration climbed to 18.7% from 12.8% in the year-ago quarter.

We believe Target’s P-fresh remodel program, 5% REDcard Rewards program and Price Match strategy will help sustain sales momentum, continue to drive traffic and enhanced customer shopping experience. In order to tap the urban markets where real estate remains a constraint, the company plans to open smaller-format stores called CityTarget.

Moreover, in order to expand its global footprint, the company is eying Canadian market with a store opening plan of 124 in 2013. In the second quarter 44 Canadian stores were opened, thereby bringing the total count to 68. Sales generated during the quarter were $275 million.

Target’s credit and debit cards penetration in Canada came in at 1.1% and 1.2%, respectively. Total store REDcard penetration came in at 2.3%.

Other Financial Details

During the quarter, Target bought back about 13.3 million shares at a price of $69.57 per share, aggregating $927 million, and also paid dividends of $231 million.

The company ended the quarter with cash and cash equivalents (including short-term investments of $249 million) of $1,018 million, long-term debt and other borrowings of $12,655 million and shareholders’ equity of $16,020 million.

Stores Update

Target currently operates 1,788 stores, of which 324 are general merchandise stores, 1,206 are expanded grocery assortment, 251 are SuperTarget stores and 7 are CityTarget stores.

Strolling Through Guidance

Target now projects adjusted earnings in the range of 80 cents to 90 cents for the third quarter. For fiscal 2013, management now anticipates earnings to come in at the lower end of the earlier provided guidance range of $4.70 to $4.90 per share due to household budgetary constraint.

On a GAAP basis (including dilution due to entry in the Canadian market), management forecasted earnings between 55 cents and 65 cents for the third quarter, whereas for fiscal 2013 earnings are envisioned to be 95 cents lower from the adjusted earnings.

The current Zacks Consensus Estimates for the third quarter and fiscal 2013 are 88 cents and $4.31 per share, respectively.

Let’s Conclude

Target is persistently trying every means to keep afloat in an economy, which is still not completely awakened from the state of hibernation. Target’s efficient marketing, multi-channel strategy, product innovation, compelling pricing strategy, and new merchandise assortments, should drive comparable-store sales and operating margins in the long term.

We expect the company to gain market share, and believe that more focus on consumable items should boost sales and earnings in a sluggish consumer environment.

The economy has not yet recovered fully. It is evident that the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may affect their discretionary spending, and in turn curtail the company’s growth and profitability.

Moreover, a greater concentration of the company’s revenue generating capabilities in limited regions of the United States, poses a competitive threat to Target, compared with Wal-Mart Stores Inc. (WMT - Free Report) and Costco Wholesale Corp. (COST - Free Report) , which are geographically diverse and more resourceful.

Currently, Target holds a Zacks Rank #4 (Sell). Another stock to be merited in the retail discount store chain sector is Ross Stores Inc. (ROST - Free Report) , which carries a Zacks Rank #2 (Buy).

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