Soft home slumps, Wall Street pummels Target on earnings
May 15, 2006,
Minneapolis — Soft home was soft indeed in Target Corp.’s first quarter, when the retailer suffered continued slack sales performance and too many markdowns in the category, particularly in its core offerings of bedding and decorative accessories.
Mistakes in last quarter’s Global Bazaar — a two-year-old program — included efforts to upscale the assortment “too far at this point in time,” he said.
For next year’s Global Bazaar, the retailer will “bring those price points down, focus more on some classification dominance, and make the kind of changes that will stimulate impulse buying and people not wanting or waiting for the assortment to go on sale,” Steinhafel said.
Already in the first quarter, Target began refining its home assortment within each of its five lifestyle preferences to better meet shoppers’ needs. It rebalanced its good-better-best mix to include more quality offerings, introduced Target Casual and Contemporary Home, and re-launched the Waverly brand. It also enhanced its in-store presentation with the addition of an endcap display of larger furniture pieces, introducing Room Essentials and upholstered seating. And it presented its designer spring home catalog to shoppers.
Steinhafel dismissed Wal-Mart’s rollout of the Luxury concept in home textiles product and packaging — for now. “We have not really seen an impact from Wal-Mart in its efforts to upscale,” he said. “We’ve seen a limited amount of upscale in home and a slight amount in apparel, but not of any meaningful scale at this point.”
First quarter profits at Target Corp. did climb higher by 12.0%, to $554 million from $494 million last year, as proceeds from its growing credit card business helped to offset thinning margins and higher costs.
But it wasn't enough for Wall Street, which has come to expect more from the fast-track retailer, and when Target missed a consensus earnings forecast by just a penny — earning 63 cents a share vs. a hoped for 64 cents — investors were quick to pounce, driving Target shares down by 8% in value after the news came out this morning. By mid-day, Target stock had rebounded somewhat, but was still down by 4.5%, or $2.36 a share, to $49.85.
Acting as a drag on the bottom line, margins narrowed modestly, by 20 basis points, or two-tenths of a percentage point, to 32.2% from 32.4%. And measured as a percentage of sales, costs jumped up by 70 basis points, or seven-tenths of a percentage point, to 23.0% from 22.3% a year ago. Measured in real dollars, costs shot up by 15.4%, outpacing an 11.8% increase in sales.
Target sales improved by 11.8%, to $12.5 billion from $11.2 billion last year. Same-store sales were up a robust 5.1%. Picking up some of the slack and propping up profits was a strong performance from Target's relatively new credit card business. Credit sales improved by 21.0%, to $370 million, and the business pumped in $162 million in pre-tax profits, rocketing up by 58.8% from year-before levels, helped by higher interest rates. During the opening quarter, credit cards accounted for about 18.3% of the retailer's pre-tax profit of $886 million.
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