Target Corporation (NYSE:TGT) announced its Q1 2014 financial results today and below is the full commentary by its CEO John Mulligan on the quarter just ended…
Thanks, John. First off today, I want to thank the Target team for their energy and commitment. The first quarter was unusually challenging as we worked hard to help our guests recover from the data breach. Because of the team’s efforts, traffic and sales trends have improved substantially and we’re in a much better position today than we were just three months ago.
Also, before I turn to the first quarter operating results, I want to briefly discuss the board’s recent announcement of Gregg Steinhafel’s departure and the initiation of a comprehensive internal and external search for a permanent replacement.
I want to thank Greg for all his contributions to Target over his 35 year career and I’m humbled to follow him into this role, even on an interim basis. With the full support of the board, Kathee and I, along with the rest of the leadership team, have made it clear to the entire Target team that we are not going to wait for a permanent CEO to improve our operations and performance. We are already taking important steps, including management changes announced yesterday to move the organization forward.
This morning we reported adjusted earnings per share of $0.70, above the midpoint of our guidance. This is the result of generally in line performance in both the U.S and Canada, combined with a better than expected tax rate, driven by a variety of small matters, none of which was individually significant.
Our U.S segment comparable sales decline of 0.3% was near the upper end of our guidance and reflects meaningful improvement from trends we were experiencing shortly after the breach.
When we survey consumers, we increasingly hear that they have put the breach behind them and they’re resuming their Target shopping habits. We’re pleased with this progress and continuing to take steps that reinforce our commitment to earn back the trust of our guests.
We recently announced that we’ve hired Bob DeRodes as our new Chief Information Officer and I’m confident that Bob is the right person to lead our technology transformation and data security remediation efforts.
That same day, we also announced the important decision to move all of our REDcards under MasterCard’s industry leading chip-and-PIN technology. This decision, along with our accelerated rollout of chip-enabled card readers to all of our stores by this September, are among many crucial steps we’re taking to restore confidence among our guests, that it’s safe to shop at Target.
First quarter Canadian segment results were also largely in line with our expectations. Sales were just below the expected range, driven by softness early in the quarter. While losses were meaningfully lower in the fourth quarter, we’re still far from where we need to be. We continued to roll out enhanced tools and technology. We’ve increased the intensity of our volume messaging, and we’ve made several important changes to the Target Canada leadership team during the quarter.
As a result, we’re beginning to see improved guest satisfaction measures regarding in-stocks and price perception. While these early signs of progress indicate that we’re moving in the right direction, we’re committed to moving faster.
As we look ahead to the second quarter and beyond, the board and our team are aligned on three priorities. The first is growing traffic and sales in our U.S. segment. While the environment is challenging, we can do better. We need to improve on something we’ve historically done well, delivering unique products and services at great prices. As a result, we’re working quickly to drive more newness in our merchandising and presentation, helping to keep Target top of mind with guests by continually reminding them why they fell in love with Target in the first place.
Second, we must improve our Canadian segment performance. Canada is a great market and Target is a great retailer, but so far, we have not lived up to our potential or our expectations. Improving operations is key, but we need to think broadly about all aspects of our business and whether other changes are needed. We’ve made changes to the Target Canada leadership team so they could take a hard look at our current performance and apply fresh thinking about how to improve.
Finally, we need to accelerate our digital transformation and become a leading Omni-channel retailer. To do this, we’ll move more quickly to become more flexible in how we serve our guests, eliminating barriers that prevent them from shopping with us, where and when they want. This includes delivering products and services more flexibly in our stores or anywhere else the guest wants to receive them.
Our common theme across all of these priorities is a continued focus on our guests, not just the ones we currently have, but the potential guests who aren’t shopping with us today. We need to listen intently to all of them, how they’re feeling, what they want and how well we’re serving them. With that knowledge, we need to make decisions based on what will inspire them, deepening their love for Target by making their lives easier and apply all of our energy to make that happen.
Finally, we know we can’t accomplish any of this unless we unleash the talents of our great team. So we are focused on prioritizing and aligning our efforts to provide greater clarity and removing roadblocks that have been slowing our team down. We will empower them to take smart risks and hold ourselves accountable for learning quickly from the results.
We have been on this journey for some time, but the board believes and we agree that we can accelerate our progress. Given the recent announcements of leadership changes, many of you asked what is going to change. While that is certainly important, I want to make sure we discuss what is and is not going to change.
What clearly will change includes our emphasis on speed throughout the organization, our commitment to more rapid improvement in Canada, our focus on digital and becoming a leading Omni-channel retailer, and the level of investment in newness and innovation and what we offer to our guests. While we work toward those goals, we’ll continue to develop smaller, more flexible store formats to allow us to serve guests in markets that can accommodate our larger store layouts. We’ll continue our expense optimization efforts. Our goal is not to cut our way to prosperity, but to free up resources we can leverage and support a faster growth.
Finally, our point of view on capital deployment remains the same. This has always been a board level discussion and we continue to be aligned with them on the following priorities: invest everything appropriate in our core business on projects that will support Target’s growth and generate superior returns; support the dividend and build on our record of more than 40 years of annual dividend increases. And beyond those first two uses, return cash through share repurchase when we have room within our middle A credit ratings.
The board has made it clear that they agree with these priorities and that our leadership team has their full support. Our mission from the board is clear: provide focus, remove roadblocks and unleash the team to move faster. As Jeff Jones, our Chief Marketing Officer likes to say, interim will not mean idle. We’re committed to making real changes now, accelerating our transformation during this transition period, while the board conducts its search for a permanent CEO.
As Kathee mentioned, our first quarter results were markedly better than our fourth quarter performance, specifically compared with the trends we were seeing late in the fourth quarter following the announcement of the data beach.
In the U.S. segment, our comparable sales decline of 0.3% was near the high end of our guidance and flat to down 2%. Comparable traffic declined 2.3%, dramatically better than our late fourth quarter trends, but well below where we should perform over time. Consistent with broader trends in the U.S. market, traffic in our stores has been declining, while transactions in our digital channels have been growing rapidly, particularly in mobile.
However, given the relative size of these two channels at Target today, the mix effect of these opposing trends is driving a decline in overall transactions. The key to reversing this decline is clear: accelerate our digital capabilities and leverage assets across both our physical and digital channels to lead guests to choose us more often than they are today.