Target Sees Profitable Holiday Despite ‘Deep Discounts,’ Cautious Shoppers

Target has “guarded expectations for sales” in the 2013 holiday season that will be “highly promotional” when it officially launches next week, CEO Gregg Steinhafel said on the company’s Q3 earnings call Thursday. Target had higher average tickets for Q3 on lower store traffic due to an economic environment where customers are “shopping cautiously” to stay within “very tight household budgets,” Steinhafel said. For the holiday shopping season that officially kicks off next week, “We will be much more overt in our price messaging,” Steinhafel said, pushing “everyday low prices, deep discounts on promotions,” price-matching policies and financial incentives for REDcard holders.

Q3 earnings per share at Target dropped from $0.96 a year ago to $0.54, Target said, as first-year sales and profits in from Canadian stores have not met expectations. Two stores will open Friday in Canada bringing to 124 the number of stores there. Sales shortfalls and earnings dilution from excess inventory and startup costs will moderate in 2014, leading to “significant improvement” in that segment, said Chief Financial Officer John Mulligan. He said Target is using excess inventory to drive “value messaging” in Canada and looking at what portion of inventory it will sell “below cost” and which it will salvage.

Overall, Target expects to be profitable for Q4 but, with six fewer holiday shopping days, the company is entering the season with “cautious optimism,” Steinhafel said. Target has a stronger merchandising and marketing focus this season on key categories including toys and electronics, Steinhafel said. Target expects to benefit from one of “the most meaningful platform launches in more than seven years” with sales of PS4 and Xbox One consoles and games, he said. Stores also will feature Beats headphones and wireless music systems from Sonos.

In Q3, Target continued to see customer anxiety over the economy and “the ability to stay within household budgets,” said Kathryn Tesija, executive vice president-merchandising and supply chain. Due to a “cautious outlook for sales,” the company is in a “very liquid inventory position,” she said. At the end of Q3, average inventory per U.S. store was up just 1 percent “to protect against the downside in a tough environment,” she said. Base inventory is large enough to enable sales “well beyond our fourth quarter plan if the season turns out to be unexpectedly strong,” Tesija said.

Target’s decision to open at 8 p.m. on Thanksgiving, an hour earlier than last year, was due to the “higher number of families that shop together, making Target part of their family tradition,” Tesija said. She cited increased competition on Thanksgiving and Black Friday and said Target will offer “hundreds of doorbuster deals,” while supplies last, in store and at Target.com through Saturday.

Cartwheel, Target’s personalized shopping app, will be part of a promotion from Sunday to Wednesday before Thanksgiving in which users who redeem a cartwheel offer will unlock an additional offer card to select a deal of their choice, Tesija said. Cartwheel will also offer “Black Friday-like” deals Wednesday on about 30 items, including toys and electronics, she said. After Black Friday, Target will offer “even more” deals for “Cyber Week,” including 15 online daily deals for two weeks, beginning Sunday Nov. 24, she said. An exception is Thanksgiving Day, when “hundreds of Black Friday deals, including almost all of the in-store deals” will be available early in the morning at Target.com, she said. In addition, two days before Thanksgiving, Target.com will run a special preview sale with 25 exclusive offers for REDcard customers, she said.

To raise awareness for its platter of offers, Target is upping its “media weight” over last year with ads on TV, digital, cinema and radio. It will be the “most digitally enabled” holiday campaign in Target’s history, Tesija said. Target is also trialing a 40 percent off deal in 89 northern California stores for apparel and accessories from Thanksgiving through Saturday and will use results to determine whether to extend a similar offer to other markets in the future, she said.

A high percentage of Target customers were aware of the government shutdown in October and a “meaningful portion” of customers said they were changing their shopping behavior in light of their current financial situation, Tesija said. Some customers said they were cutting back on shopping trips “for fear they would be tempted to spend too much,” a behavior Target first encountered during the recession, she said.

All Target stores began offering in-store pickup Nov. 1 following a limited Q2 test in Minneapolis, Tesija said. Customers are using the service to reserve high-ticket items including iPads and other specials from the weekly circular to get the item “before it sells out,” she said. Top categories for in-store pick up are baby, furniture and electronics, and the strongest markets for the service have been New York, Chicago and Seattle, she said. Target shares closed 3.4 percent lower at $64.20.