Target blamed the weather for slow sales, but analysts don’t think that’s the whole story. The retailer’s stock fell 4 percent.
People can rightly blame bad weather for canceled baseball games, traffic jams, and even foul moods. But for Wall Street, the excuse is starting to wear thin.
Target Corp. learned that lesson the hard way Monday after it reported weak first-quarter sales, a performance it blamed largely on cold weather that kept shoppers from its stores. Investors were unswayed as Target shares fell 4 percent, or $2.86, to close at $68.40.
“Our first-quarter earnings fell short of our expectations, as we faced a choppy and challenging environment caused by unfavorable weather and this year’s payroll tax increase,” CEO Gregg Steinhafel told analysts during a conference call. “Our U.S. business generated softer-than-expected sales and traffic, particularly in our seasonal categories as we experienced one of the coldest spring seasons on record.”
But some analysts were skeptical that bad weather, which can impact store traffic, had as great of an impact on Target’s sales. For one thing, Target also reported weak sales and falling traffic in the fourth quarter of last year, during the crucial holiday shopping season when shoppers were out in force.
“Weather does not even make up [a quarter] of their sales decline,” said Robin Lewis, CEO of the Robin Report, a retail strategy newsletter.
The Minneapolis-based retailer said sales at stores open for at least a year dropped 0.6 percent while overall sales were nearly flat at $16.6 billion. Specifically, Target executives said cold weather that persisted into spring especially hurt seasonal goods like clothing, lawn, patio, and sporting goods.
Target and Wal-Mart Stores Inc., which also blamed the weather for its lackluster results, are losing market share to smaller dollar stores and “off-price” retailers like T.J. Maxx and Marshalls, analysts said. Neither Target nor Wal-Mart open many stores in the United States anymore, while dollar stores and outlet centers are quickly adding square footage.
With its focus on discounted national brands, outlet centers steal apparel customers from Target, Lewis said. Dollar stores, which are opening locations closer to consumers’ homes, swipe the bottom end of Target’s customer base.
“Target is getting hit big time by the dollar stores,” Lewis said.
Amy Koo, an analyst with Kantar Retail consulting firm in Boston, said Target faces a much more serious long term challenge than incremental weather. Despite its exclusive design partnerships, 5 percent Redcard loyalty program, and P-Fresh grocery formats, fewer people are visiting a Target store.
The company reported the number of store transactions in the first quarter fell 1.9 percent compared to a 2 percent gain during the same period in 2012. In the fourth quarter, transactions dropped one percent.
For all of 2012, the number of transactions rose only 0.5 percent, a slight improvement over the 0.4 percent gain Target posted during the previous 12 months.
One bright spot for Target is that Redcard use continues to grow by double digits. However, shoppers seem to be gravitating primarily toward lower-margin, non-discretionary products like food and toilet paper instead of higher-margin merchandise like clothing, household goods, and electronics.
“How much toilet paper can someone possibly need?” Koo said.
That’s why Target needs to ramp up its digital sales, whether Target.com or mobile, Koo said. But that takes time, and Target is “only now getting started,” she said.
In the meantime, Target will base much of its growth prospects on Canada. The company opened 24 stores in the first quarter and early results look strong. Those stores generated about $86 million in sales in just two months with a better than expected gross profit margin rate of 38.4 percent.
“Canada was absolutely the right move to make,” Lewis said. “They would do well the faster they can get up in Canada. But whether it can offset the stores in the U.S., I don’t know.”
Thomas Lee • 612-673-4113