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Target’s Q2 Profits Fall 62%

Minneapolis — Early debt retirement and expenses stemming from last year’s consumer data breach took a toll on Target’s second-quarter profits.

Net earnings fell 61.7 percent to $234 million for the three months, ended Aug. 2, while net sales rose 1.7 percent to $17.4 billion and digital sales increased 30 percent.

Target’s gross margin rate fell from 31.6 percent to 18.4 percent year over year as the company continued to clear excess inventory during the quarter. At the same time, tighter cost controls resulted in a decrease in SG&A expense rate (selling, general and administrative expense), from 20.6 percent, to 20.4 percent.

Total U.S. sales edged up 0.7 percent to $17 billion, and comp sales were flat. Domestic transactions declined 1.3 percent, a 1 percent improvement over the prior quarter, and earnings before interest expense and income taxes (EBIT) declined 12.8 percent, to $1.2 billion.

In a statement, Target CFO John Mulligan said U.S. traffic trends continue to recover and monthly sales are improving, with July comps up more than 1 percent. The momentum continued into August, he noted, driven by early back-to-school results.

Added newly named chairman/CEO Brian Cornell,  “I’m excited to join the team as we work to drive U.S. traffic and sales, improve Canadian operations and accelerate Target’s digital transformation.”

Cornell, a former president/CEO of Sam’s Club, said he will be working with Target’s leadership team over the coming weeks and months to develop a “guest-focused, strategic plans to position Target for long-run success.”

In a research note, Janney retail analyst David Strasser expressed concern over a sharp cut in Target’s full-year earnings guidance, but said the company is well-positioned for a turnaround.

“They continue to have a strong and iconic brand name, strong cash flows and great real estate. This gives them a chance to bounce back, and reclaim their place in the U.S. retail landscape,” he wrote.

“Companies like Home Depot and Best Buy shared these common strengths and gave them a chance to really bounce back and drive renewed earnings growth,” Strasser observed. “It is up to new CEO Brian Cornell to leverage these assets, utilizing the profit and loss correctly to drive appropriate pricing and service levels at the store.”