Weak Sales Cut Target’s Q1 Profits by 29%

In Industry News, Reports, What's New by Jeff PrineLeave a Comment

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Minneapolis—Following up its April warnings that its first quarter results would be weaker than expected, Target Corp. today confirmed its profit fell 29%. And the discount retailer lowered its full year forecast due to the weak quarterly results, sending its shares down in early trading.

For the quarter ended May 4, Target posted earnings of $498 million, or 77 cents a share, compared to $697 million, or $1.04 a share, a year earlier. The earnings included the effects of its new Canadian stores, but excluding losses related to the early retirement of debt and gains from the sale of its credit card business, Target earned 82 cents a share. But analysts’ average estimate expected earnings of 85 cents a share.

Total net sales rose 1% to $16.71 billion, while analysts expected slightly more: $16.78 billion. Comparable store sales edged down 0.6% as the number of transactions fell 1.9 percent. In April, Target had forecast comp store sales would be about flat compared to its previous outlook of flat to up 2%.

“This is Target’s weakest quarterly same-store sales performance since the Great Recession year of 2009,” noted Sandy Skrovan, U.S. research director at Planet Retail.

The first of Target’s Canadian stores, some 24 doors, earned $86 million in sales. The retailer plans to have 124 stores in Canada by year’s end. But the costs of opening those doors reduced its first quarter earnings by 24 cents a share, the company said.

Much like recent reports from Walmart and Kohl’s, which blamed unusually cold weather and the effects of this year’s payroll tax increase for muted first quarter results, Target, too, noted a similar impact. In fact, Target said it surveyed customers and found that nearly 75% of them were aware of the payroll tax increase and the majority had noticed its impact on their spending.

Impact of Payroll Tax Increase?

The end of a 2% payroll tax cut went into effect on Jan. 1 and the smaller paychecks have made some consumers less willing to spend. Still, declining gasoline prices have offset some of that impact.

“We remain cautiously optimistic about both the macroeconomic environment and consumer behavior,” Gregg Steinhafel, chairman/ceo told analysts on an earnings call. “Both of these business drivers continue to reflect slow, uneven growth and ongoing cross-current of positive and negative indicators, just as they have for the past few years.”

Steinhafel pointed out that the housing marketing is on the road to recovery and unemployment insurance has bee on the decline though younger customers still face a weak job market.

Target shoppers took advantage of the 5% discount Target offers to users of its REDcards. About 17.1% of sales were paid for with REDcard credit/debit cards compared to 11.6% a year ago.

Target also said its small urban store concepts did well in Seattle, Los Angeles and Chicago. And the retailer is continuing to team up with big name designers for limited edition collections. The next one with Phillip Lim is due to hit stores in September.

As far as estimates for its current quarter, Target said it expects a 2% to 3% gain in comp sales with adjusted earnings per share in the range of $1.09 to $1.19. Analysts’ estimate expects $1.11 a share in the second quarter.

Target reduced its full year earnings forecast to $4.70 to $4.90 a share, down from its previous estimate for $4.85 to $5.05 a share. Analysts’ consensus expects $4.63 for the year.