Coverage: Target in recovery mode

Target surprisingly beat analysts’ estimates for third quarter earnings, indicating that the company is beginning to recover from recent issues. And with the holiday shopping season upon us, it’s a good thing.

Rachel Abrams had this story in The New York Times:

Target reported profit had risen in the third quarter, a sign that the retailer is recovering from the fallout from its huge data breach last year.

On Wednesday, the retailer reported that profit had risen 3.1 percent, to $352 million, up from $341 million in the same period last year. In the last quarter, its profit dropped more than 60 percent as expenses piled up to deal with the breach of tens of millions of consumers’ personal data.

Target said it expected full-year earnings per share of $3.15 to $3.25, tightened from earlier estimates of $3.10 to $3.30. In the third quarter, adjusted earnings per share dropped 3 percent to 54 cents, and sales rose 2.8 percent to $17.7 billion.

“We’re pleased with our third-quarter financial results, which were driven by better-than-expected performance in our U.S. segment,” Brian Cornell, Target’s chairman and chief executive, said in a statement.

The Washington Post story by Sarah Halzack reported that the company felt it had moved past last year’s data breach:

The Minneapolis-based retailer said that lower gas prices likely encouraged consumers to spend more this quarter, though chief financial officer John Mulligan said during a conference call that Target couldn’t make a direct correlation between its own sales improvement and lower prices at the pump. Target also said it was able to pull back significantly on the heavy discounts and promotions it had been offering earlier in the year, perhaps a sign that consumers’ fatter wallets were making them somewhat less price-sensitive.

Target said that event-based shopping for back-to-school and Halloween were crucial to sales growth this past quarter.  The retailer’s chief rival, Wal-Mart, also pointed to those events as a tailwind in the most recent quarter.

As for last year’s data breach, Target said it is finally in the rearview mirror. The company has absorbed what it believes are the “vast majority” of financial charges related to the breach, Mulligan said, and customer surveys show that shoppers have largely returned to the stores.

“We feel like we’ve really moved past the breach, and our guests moved past it more quickly than, frankly, some of those who write about us,” Mulligan said.

Despite the good news, Target still needs to attract more people to visit a retail location, Paul Ziobro wrote for The Wall Street Journal:

The retailer continues to wrestle with the challenge that fewer shoppers are visiting its stores. The number of shopper transactions in the U.S. edged down 0.4% in the third quarter, marking eight straight periods of declines, though it was the narrowest drop in more than a year. And there are signs that Target is willing to compromise profitability to bring in reluctant shoppers. Margins slipped to 29.5% from 30% a year earlier because of increased deals, though Mr. Mulligan noted that the amount of promotions tempered during the quarter.

“We need to get to a place where we continue to grow traffic in our stores,” Mr. Mulligan said.

Target is trying to dig itself out of a multiyear funk, as shoppers visited the retailer less often because of lackluster merchandise and fewer new products—a disappointment for customers expecting the type of cheap-chic fashions and housewares that gave Target cachet and earned it the “Tar-zhay” nickname. Shopping habits changed, too, as more people found they could easily make their purchases online, eliminating the need to visit stores and the accompanying impulse purchases.

Mr. Cornell is leading the turnaround. Hired from PepsiCo Inc. this summer, he has pledged to focus on critical categories like fashion, furniture, baby items and beauty products that Target hopes can help it stand out.

But while it might need to increase traffic, same store sales were up in the quarter, Samantha Sharf wrote for Forbes:

The company’s U.S. segment was a strong spot, with same store sales growth of 1.2% including digital sales growth of more than 30%. Target had previously forecast same store sales to be flat to 1% growth. U.S. revenue grew 1.9% to $17.3 billion. “We’re pleased with our third quarter financial results, which were driven by better-than-expected performance in our U.S. Segment,” said CEO Brian Cornell in a statement. Cornell took over the top job at Target this summer after Gregg Steinhafel resigned in the wake of the holiday season breach. “We’re encouraged by the improving trend we’ve seen in our U.S. business throughout the year, and our fourth quarter plans are designed to sustain this momentum.” In Canada, a newer and smaller region for the 1,934 store strong retailer, things were also looking up. Same store sales increased 1.6% Revenue grew 43.8% to $479 million.

While it’s taken a year, shareholders must be impressed with the turnaround and the changes made by Target’s new leadership. The positive momentum bodes well for the holiday season as retailers fight for customers’ wallet share. The third quarter earnings season is nearly over, so ending with good numbers from a large retailer should give money managers some extra confidence.