Target Corp cut its outlook for the second time
this year as traffic at its stores fell again, even though the discounter
ramped up promotions to bring shoppers in. The profit warning came after rival Wal-Mart
Stores Inc. lowered its own financial forecast last week, highlighting
that Target is struggling not only with problems of its own making but also a persistent shift in shopper
habits.
The dimmer outlooks are an indication that the brutal
promotional war retailers are waging for lower- and middle-income shoppers will
remain intense into the holidays. On Wednesday, Target reported a 62% drop in
earnings for the period ended Aug. 2, as losses in Canada continued and margins
shrank due to heavy discounting. The price cuts didn't entirely work. Target
rang up 1.3% fewer transactions at U.S. stores open more than 13 months, its
seventh straight quarter of falling traffic.
Overall, Target reported earnings for the quarter of $234
million, down from $611 million a year earlier. Sales edged up 1.7% to $17.41
billion. The company's shares were up 1.2% at $59.98.
Target's U.S. same-store sales came in flat for the quarter,
as customers did spend more per visit. John Mulligan, Chief Financial Officer, said
Target needs to keep the discounts flowing, even at the risk of training
customers to expect lower prices. Margins fell to 30.4% in the latest quarter
from 31.4% a year earlier. Later, the company will try to get better
merchandise onto its shelves, something that Target strayed away from in recent
years as it took fewer risks.
Turning around that trend is one of the main challenges
facing new Chief Executive Brian Cornell, who also has experience running
Wal-Mart's Sam's Club unit, must also figure out how to make Target more
competitive in a world where more shoppers buy online.
Another looming issue is Canada. Target bungled its
entry into the country last year by opening too many stores at once and
not getting its supply chain in order. The company is lowering prices there to
be more competitive, but the latest quarter produced another $204 million in
losses, bringing total losses in the country to more than $1.8 billion. Sales
at Canadian stores open more than 13 months were down 11.4%.
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