Target's Canadian expansion has suffered from poorly managed inventory planning and a lack of understanding of the Canadian market. Meanwhile, merchandise even in U.S. stores has lost its gotta-have-it quality, and foot traffic had been slowly declining, even before the breach happened.
"They're behind the curve right now," says Sandy Skrovan, U.S. research director for Planet Retail, a retail research and advisory firm. "It's kind of like they've had blinders on to the changing competitive landscape."
In the first quarter, Target's net earnings fell 16% to $418 million, or 66 cents a share, compared with $498 million in the same period last year, the company announced Wednesday. Sales increased 2.1% over last year to about $17 billion. Earnings related to U.S. stores decreased 13.5% to about $1.1 billion from about $1.2 billion last year.
For the year, Target cut its estimated earnings per share to between $3.60 and $3.90 compared with prior guidance of $3.85 to $4.15. Brian Yarbrough, an analyst with Edward Jones, suspects that's because the chain plans to be highly promotional to try to get customers back in stores, which will eat into profit margins.
The results come as Target continues to try to win back customers wary of shopping after the breach, which Target says cost the company $26 million in the first quarter — $18 million in net expenses and an $8 million insurance receivable. The number of transactions in U.S. stores fell 2.3%, contributing to a 0.3% decline in comparable store sales.
Brian Sozzi, CEO of Belus Capital Advisors, says that's been a trend for the past two years though. He and Skrovan both say that despite problems in Canada, Target has lost sight of its core market at home.
"They really need to figure out wha! t they can do that's bold and innovative to get some excitement in the stores," Skrovan says. "They can't rely solely on price alone."
In a call with media and analysts Wednesday, interim CEO John Mulligan acknowledged the need to build traffic and sales at U.S. stores and outlined the company's major priorities, including offering customers newer and better products.
"We're still far from where we need to be," he said. "We're committed to moving faster."
Mulligan is just one of several new leaders and internal promotions in recent weeks. Target executives are getting the boot as the company looks for fresh leadership and a new vision to salvage its reputation. CEO Gregg Steinhafel resigned earlier this month, Target hired a new CIO to oversee technology and security as it beefs up both in the wake of the breach, and this week it replaced the head of its Canadian operation.
While the Canadian operation did slightly better than in the fourth quarter, it still operated at a loss of $211 million, compared with a loss of $205 million last year. Target opened 124 stores in Canada last year and plans to open nine more this year. As a whole, the Canadian segment lost $941 million last year.
The slight signs of improvement this year so far are "key," Yarbrough says. He says Target Canada has suffered from empty store shelves of in-demand goods while at the same time having to significantly mark down excess merchandise that isn't selling as well.
"They don't have a good feel or understanding on what the Canadian consumer is about," he says.
As competitors like Wal-Mart often offer better prices and others like Macy's and Amazon offer better digital experiences, Target has lost its "Tar-jay" cachet.
"The insides of competing stores are rapidly changing," Sozzi says, "and there is Target, still trying to live off a cheap chic reputation that it hasn't earned for three years."
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