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Q1 2013 Results Earnings Call
May 22, 2013 7:30 a.m. ET
Gregg Steinhafel - Chairman, CEO, and President
Kathryn Tesija - EVP, Merchandising
John Mulligan - CFO
Peter Benedict - Robert W. Baird
Sean Naughton - Piper Jaffray
Colin McGranahan - Sanford C. Bernstein
Bob Drbul - Barclays
Deborah Weinswig - Citigroup
Chris Horvers - JPMorgan
Previous Statements by TGT
» Target CEO Discusses Q4 2012 Results - Earnings Call Transcript
» Target Management Discusses Q3 2012 Results - Earnings Call Transcript
» Target Management Discusses Q2 2012 Results - Earnings Call Transcript
» Target's CEO Hosts 2012 Shareholders Meeting (Transcript)
Good morning, and welcome to our 2013 first quarter earnings conference call. On the line with me today are Kathy Tesija, executive vice president of merchandising; and John Mulligan, executive vice president and chief financial officer.
This morning, I'll provide a high-level summary of our first quarter results and strategic priorities for the rest of the year, and Kathy will discuss category results, guest insights, and upcoming initiatives. And finally, John will provide more detail on our financial performance, along with our outlook for second quarter and the full year. Following John's remarks, we'll open the phone lines for a question and answer session.
As a reminder, we're joined on this conference call by investors and others who are listening to our comments today via webcast. Following this conference call, John Hulbert and John Mulligan will be available throughout the day to answer any follow-up questions you may have. Also, as a reminder, any forward-looking statements that we make this morning are subject to risks and uncertainties, the most important of which are described in our SEC filings.
Finally, in these remarks, we refer to adjusted earnings per share, which is a non-GAAP financial measure. A reconciliation to our GAAP results is included in this morning's press release posted on our Investor Relations website.
Our first quarter earnings fell short of our expectations, as we faced a choppy and challenging environment caused by unfavorable weather and this year’s payroll tax increase. Our U.S. business generated softer than expected sales and traffic, particularly in our seasonal categories, as we experienced one of the coldest spring seasons on record, following record warmth a year ago.
While we are not satisfied with this quarter’s performance, we remain highly confident in our strategy and our team’s ability to deliver strong results going forward across a broad range of conditions. In the first quarter, our U.S. segment generated adjusted earnings per share of $1.05, down 5% from last year’s outstanding performance.
Our first quarter GAAP earnings per share were $0.77, $0.28 lower than adjusted EPS, driven primarily by $0.24 of dilution attributable to our Canadian segment. As we mentioned in our fourth quarter call, this year there are several notable changes affecting our financial reporting which John will cover in detail in a few minutes.
In the quarter, comparable store sales declined 0.6% from last year’s 5.3% increase. First quarter comparable transactions were down 1.9%, following last year’s increase of 2%, keeping us essentially flat on a two-year basis. In much of the U.S., traffic in our seasonal categories was unexpectedly soft, as guests held off purchasing spring items in the face of cold and wet weather. Our merchandising teams did a great job of reacting to the pace of sales in these categories, retiming receipts and adjusting them downward, so we are still in a healthy inventory position today.
Despite the weather impact on seasonal categories, sales and traffic in our digital channels continued to grow at a robust pace. Overall, first quarter digital sales grew in the high teens, and increased more than 20% net of our most seasonally sensitive categories.
Target’s mobile traffic and sales continue to grow at a triple-digit pace, with mobile traffic representing more than 30% of our digital traffic in the first quarter. We’re pleased with these results, as mobile is rapidly becoming the key platform for digital commerce across all of retail, and we know that Target guests have a particular affinity for mobile engagement.
After two years of preparation, in March we opened our first 24 Canadian stores in the greater Toronto area, and we’re very pleased with the reception we received from our new Canadian guests. We experienced an unexpectedly strong surge in sales as guests were eager to see their newly opened Target store. The mix of sales in home and apparel was even higher than expected, as guests shopped our assortment of stylish owned brands and national brands, responding to the outstanding value we provide on both.
Now that we are beyond the grand opening surge in this first cycle of stores, we’re encouraging our new Canadian guests to make Target a preferred destination for categories throughout the store, including food, health, beauty, and household essentials, as these categories play a key role in driving trip frequency over time.
As it is already in the U.S., Red Card Rewards will be a key differentiator for Target in Canada, and we’re encouraged that Red Card penetration of sales in our Canadian segment was ahead of plan in the first quarter. Two weeks ago, we opened our second wave of 24 Canadian stores in British Columbia, Alberta, and Manitoba, and we’re very pleased with the initial guest response in these markets and the ability of our teams and systems to accommodate the increasing volume of traffic and sales.
We plan to open another 20 stores in Canada later in the quarter, on the way to operating 124 Canadian stores by the end of this year. This means we expect to open more Target stores in our first year in Canada than we opened in our first 10 years in the United States, an incredible accomplishment that has required unprecedented effort by teams throughout the company.
In the U.S., we opened six new stores in the first quarter, including an additional City Target location in Los Angeles. We now operate six City Target locations in four cities, and we continue to be pleased with the results in these stores. Sales have essentially met our expectations and the mix of home and apparel has been better than expected.