Target beats on earnings, lowers guidance

“While we recognize there are opportunities in the business, and are addressing the challenges we are facing in a difficult retail environment, we are pleased that our team delivered second quarter profitability above our expectations,” Chairman and CEO Brian Cornell said in a statement.

The bull’s-eye retailer said it earned $1.23 a share in the fiscal second quarter on $16.17 billion in revenue. Analysts had expected Target to report earnings of $1.12 a share on $16.18 billion in revenue.

In last year’s second quarter, Target earned $1.22 a share on sales of $17.43 billion. The company completed the sale of its pharmacy business to CVS in December, which has pressured its revenue.

Target’s comparable sales decline of 1.1 percent fell in line with a Thomson Reuters forecast, which called for a 1 percent drop. It was the first time this metric was negative since first quarter 2014, and was driven lower by fewer transactions. The number of transactions is often used as a gauge for traffic.

The company’s digital sales growth likewise slowed, increasing by more than 16 percent during the quarter. That compares with a 23 percent lift in the first quarter and a 30 percent gain in the prior-year period.

Because only about 4 percent of Target’s sales come from digital, this number should be higher than the overall market’s mid-teen e-commerce growth, JP Morgan analyst Chris Horvers told CNBC’s“Squawk Box.”

“Target being in line is not good enough,” he said. “They’re playing catch up so they should be outperforming the market at this point.”

Citing a challenging environment, Target issued weak third-quarter guidance and lowered its forecast for the year. The company now expects to earn $4.80 to $5.20 a share, compared with prior guidance of $5.20 to $5.40. It expects comparable sales in the third and fourth quarters to come in flat to down 2 percent. It had previously said it expected full-year comparable sales to grow 1.5 to 2.5 percent.

In the third quarter, Target expects to earn 75 cents to 95 cents a share, compared with Wall Street’s forecast for 95 cents, according to Thomson Reuters.

That guidance is concerning for a retailer that is so rooted in back-to-school selling, particularly as department stores have spoken more optimistically about the second half, Horvers said.

“I think it’s going to highlight concerns about share loss versus the likes of Amazon, and we’ll see with what Wal-Mart has to say tomorrow,” he said. If sales don’t pick up, Wall Street may need to bring down its forecasts for next year, Horvers said.

To stand out from the competition and revitalize its image as cheap but chic, Target has been focusing on its “signature categories” — style, baby, kids and wellness. Sales trends in these businesses have outpaced those of the broader company. In the fiscal second quarter, sales in these categories outpaced the total business by 3 percentage points.

The retailer has also been eyeing upgrades to its grocery business, though these changes have been slow to take shape. In the first quarter, Target saw a decline in small “fill-in” trips that generate repeat traffic — something analysts will be looking for during the company’s conference call.

The retailer is also opening smaller stores in densely populated markets including Chicago and Philadelphia, where its sales productivity is typically much higher than the company average. These locations have been meeting or exceeding Target’s profitability goals, the retailer said. Target has plans to open two Manhattan stores — this fall and in 2018.

“Although we are planning for a challenging environment in the back half of the year, we believe we have the right strategy to restore traffic and sales growth over time,” Cornell said.

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