Target Earnings Meet Estimates but Drop Y/Y, Outlook Trimmed - Analyst Blog

Target Corporation ( TGT ) posted second-quarter fiscal 2014 results, wherein adjusted earnings of 78 cents a share came in line with the Zacks Consensus Estimate but declined 20.6% from the year-ago quarter. The lower-than-expected results compelled management to lower its full-year earnings projection.

Including one-time items, earnings of this Zacks Rank #5 (Strong Sell) stock came in at 37 cents a share, down substantially from 95 cents delivered in the prior-year quarter.

The massive data breach hurt Target's results. The beleaguered retailer faced its worst security breach ever last holiday season when information related to credit and debit card data of approximately 70 million customers was hacked. The breach has shaken consumer confidence, resulting in lesser foot traffic and a public relations nightmare for the company. Moreover, rises in operating expenses and higher interest expense also weighed upon the bottom-line.

Target has been trying hard to improve traffic count at its domestic stores and firm its position in the Canadian turf. Moreover, with Brian Cornell being elected as the Chief Executive Officer and Chairman, management is hopeful of battling near-term headwinds and transforming into a leading omni-channel retailer.

Let's Unveil the Picture

Total sales increased 1.7% to $17,406 million from the prior-year quarter but fell short of the Zacks Consensus Estimate of $17,437 million. Sales for the U.S. segment came in at $16,957 million, up 0.7% year-over-year.

Minneapolis, MN-based Target said that comparable-store sales for the quarter remained flat compared with 1.2% growth registered in the prior-year quarter. The number of transactions edged down 1.3%, though the average transaction amount climbed 1.3% in the quarter.

Gross profit at the U.S. segment tumbled 2.4% to $5,159 million, whereas gross margin contracted 100 basis points to 30.4% due to higher promotions. Segment operating income dipped 12.8% to $1,160 million, whereas operating margin shriveled 110 basis points to 6.8%.

Target's credit card penetration increased 40 basis points to 9.7%, whereas debit card penetration expanded 170 basis points to 11.1% during the quarter. Total REDcard penetration climbed to 20.8% from 18.7% in the year-ago quarter.

We believe Target's P-fresh remodel program, 5% REDcard Rewards program and Price Match strategy will help in augmenting sales performance. Moreover, in order to expand its global footprint, the company continues to attempt to grow the Canadian market. Sales generated during the quarter were $449 million, up substantially from $275 million in the prior-year period.

Gross profit at the Canadian segment fell 5.2% to $82 million, whereas gross margin contracted to 18.4% from 31.6% due to clearance of excess inventory.

Target's credit and debit cards penetration in Canada came in at 2.5% and 2.3%, up 140 basis points and 110 basis points, respectively. Total REDcard penetration came in at 4.8% compared with 2.3% in the prior-year period.

Other Financial Details

During the quarter, Target bought back 614,000 shares at $55.36 per share and paid dividends of $272 million. The company ended the quarter with cash and cash equivalents (including short-term investments of $3 million) of $803 million, long-term debt and other borrowings of $13,852 million and shareholders' equity of $16,433 million.

Stores Update

Target, which competes with Costco Wholesale Corp. ( COST ) and Wal-Mart Stores Inc. ( WMT ), currently operates 1,795 stores in the United States, of which 259 are general merchandise stores, 1,278 are expanded grocery assortment, 249 are SuperTarget stores, 8 are CityTarget stores and 1 TargetExpress store. In Canada, the company operates 130 general merchandise stores.

Strolling Through Guidance

Target now projects adjusted earnings in the range of 40 cents to 50 cents a share for the third quarter and between $3.10 and $3.30 per share for fiscal 2014. Earlier, the company had projected earnings in the band of $3.60 to $3.90 per share.

The current Zacks Consensus Estimates for the third quarter and fiscal 2014 are 64 cents and $3.47, respectively, which could witness a downward revision in the coming days.

Stock That Warrant a Look

Stock worth considering in the retail sector is Burlington Stores, Inc. ( BURL ) carrying a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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