Target continues to pay for its massive data breach that occurred during last year’s fourth quarter, but it appears the retailer has nearly recovered from most of the issues stemming from the breach as this year’s third-quarter earnings beat analysts and company expectations for both profit and sales.
"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,” CFO John Mulligan said during Wednesday’s (Nov. 19) earnings call, adding that the company has addressed a majority of expenses related to the breach.
Target’s third-quarter earnings report showed its net breach-related expenses for 2014 were $158 million, reflecting $248 million of gross expenses, which was offset by the company’s $90 million insurance coverage. This year’s third-quarter expenses only accounted for $12 million of that. Last quarter, the company incurred gross breach-related expenses of $148 million, partially offset by the recognition of a $38 million insurance receivable.
Despite posting a sales growth of 1.2 percent, a digital sales growth of more than 30 percent, and a 3.1 percent profit increase to $352 million, Target is still struggling to keep up with foot traffic in its Canadian and U.S. stores. Revenue also increased slightly to $17.73 billion from $17.26 billion a year ago. Target projects a 2 percent same-store sales growth next quarter.
In comparison to Wal-Mart, which posted its first sales growth for the first time in nearly two years in the third quarter, Target had a larger percentage growth in sales. Wal-Mart posted a .5 percent sales gowth for the quarter. Wal-Mart doesn’t have the same free-shipping deal as Target this holiday season, but CEO Greg Foran did authorize stores to match prices even more this holiday season and keep profits in line with competitors like Amazon. While Target is focused on online growth, there’s still a large emphasis on growing stores and increasing foot traffic. Wal-Mart, however said in its third-quarter earnings call that is has scaled back opening more stores and focused on its online efforts, particularly globally.
On the earnings side, Target’s credit card penetration increased 30 basis points to 9.8 percent and debit card penetration expanded 80 basis points to 11.2 percent during third quarter. Total REDcard market penetration climbed to 21 percent from 19.9 percent in the year-ago quarter. The company’s third-quarter earnings show a positive growth from last year’s results, which showed a 60 percent profit dip from the year prior — largely in part to expenses from the data breach that piled up in the second quarter.
While it may have a handle on the digital side of the store, and addressed security measures, like many stores Target struggles to boost its foot traffic. In fact, foot traffic for the quarter was down slightly (.4 percent) in Target’s U.S. Stores. Target is among the retailers that accepts Apple Pay, but the company didn’t offer any figures on how that has impacted traffic or sales.
Canadian expansion has also been a disappointment, said CEO Brian Cornell, who joined in August. Target is going to wait to review if changes need to be made in the Canadian market after the holiday season. Target’s sales in Canada rose 44 percent in the quarter to $479 million, but still posted a loss of $211 million before interest and taxes.
"While there is much more work to be done, I’m very pleased with the momentum we’re seeing in the U.S. business and the changes we’ve implemented to better position our Canadian segment,” Cornell said during the earnings call. Mulligan used harsher words about the Canadian market, saying the results for the quarter were “unacceptable.” Both agreed the market needs “to see a step-change in performance.”
In anticipation of a busy holiday season, and to give it an edge on competition, in October Target began offering free shipping on all purchases during the holiday season. They haven’t released specific figures, but said Target.com has seen a “significant increase” in online orders.
“The impact was almost immediate. We’re seeing more orders.” Mulligan said, and later commented that the company needs to “continue to grow traffic in our stores.”
Target’s order online/in-store pickup option was also highlighted as a growing strength for the consumer to keep the brick-and-mortar side and online customer connected. In-store pick up accounts for about 15 percent of digital traffic, and based on last year’s results around the holidays, the company expects that to be much higher — although a specific number was not provided. Moving into Black Friday, however, Target executives remained cautiously optimistic.
“We are being cautious, despite the higher-than-expected expectations. The bulk of the season remains ahead of us,” Cornell said. “We are expecting a better fourth-quarter than last, year over year. We believe the pressure will be more than offset than annualizing last year’s breach breakdowns.”