Target’s biggest challenge isn’t bouncing back from the data breach

Shoppers walk though a Target Corp. store in Torrance, California, U.S., on Tuesday, August 20, 2013. Target is expected to announce quarterly earnings results on Aug. 21, 2013. Photographer: Patrick T. Fallon/Bloomberg
Shoppers walk though a Target store in Torrance, Calif. Photographer: Patrick T. Fallon/Bloomberg

Target continues to struggle to bounce back from a massive security breach last year, but its latest earnings report released Wednesday morning shows that the shopping habits of low- and middle-income consumers may be a bigger problem.

Chief financial officer John Mulligan said that the “vast majority” of Target shoppers who came to the store before the breach have returned to their stores, a sign that the company is slowly rebuilding trust after the cyber attack exposed millions of consumers’ credit card data.  But Mulligan noted that its shoppers have remained deal-conscious and cautious about spending money amid the tepid economic recovery.  That forced the Minneapolis-based company to offer more discounts in the second quarter than it planned to, which in turn ate into its profit margins.

Target’s revenue increased 1.7 percent in the second quarter to $17.4 billion, but profit plunged nearly 62 percent to $234 million.

Mulligan said he expects the company to return to what it considers a more normal cadence of promotions later this year, even though he acknowledged that customers will likely continue to focus on savings.  Mulligan said back-to-school shopping at Target has so far appeared to be relatively strong in August, though those sales would not be reflected in this latest report.

Target’s chief rival, Wal-Mart, noted similar challenges in its earnings report last week, which showed the company saw flat sales in the U.S.  Meanwhile, both big-box stores are also facing competition from smaller retailers such as Dollar General, Family Dollar and Dollar Tree.  But with wages remaining stagnant for low- and middle-income workers, all of these outlets are fighting for a cohort of consumers that has limited dollars to spend is hunting for cheap prices.

Amy Koo, a senior analyst with Kantar Retail, said that Target’s struggle with low- and middle-income consumers may also be tied to their focus on wealthier consumers in the wake of the recession.  (She points to Target’s 2012 holiday collaboration with Neiman Marcus as a clear reflection of that approach.) Now that a recovery is underway, “they might have misjudged how much they could extract from those higher-end shoppers,” Koo said.

The earnings results underscore the scale of the challenges faced by new chief executive Brian Cornell, a former Pepsico executive who took the helm of Target this month, replacing ousted chief executive Gregg Steinhafel.

Target has undertaken a flurry of measures to try to strengthen a reeling company.  It announced in August that it would experiment with extended hours at many of its U.S. stores, with hundreds of shops open until 11:00 p.m. and hundreds more open until midnight.  In July, it opened its first Target Express store, a format that is about 15 percent as large as a typical Target store and that could allow the chain to get better penetration in urban markets. Chief merchandising and supply chain officer Kathee Tesija told investors Wednesday that so far, the shopping patterns in Target Express are shaping up as they’d expected:  There is greater foot traffic than in a regular-size Target store but customers are buying fewer items.

It also recently unveiled a turnaround plan for its nascent international business.  Target made its first push outside the U.S. last year, opening more than 100 stores in Canada.  However, the company has acknowledged that its launch there has been rocky, dogged by problems with its supply chain and the mix of products on its shelves.

Mulligan told reporters on a Wednesday conference call that Target is working to improve its systems so stores can maintain inventory more effectively, and is redesigning its weekly sales flyers in Canada to focus more on the home goods and apparel that it believes consumers are most hungry for.  Also, Target initially launched in Canada with stores that didn’t offer all of the merchandise its stores offer in the U.S.; the company is now pushing to get more of those products in Canadian stores.

“Current financial performance in Canada remains unacceptable,” Mulligan said in a conference call with investors.

While shoppers appear to be returning to Target, America’s fourth-largest retailer is still dealing with some fallout from the cyber breach.  The company said the breach has cost it $146 million so far. Target also has seen a slowdown in applications for its RedCard debit cards since the breach.

After initially plunging when the markets opened, Target’s stock rose nearly 2 percent to $60 a share on Wednesday.

Sarah Halzack is The Washington Post's national retail reporter. She has previously covered the local job market and the business of talent and hiring. She has also served as a Web producer for business and economics news.
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