Sometimes you can go through a whole conference call and never hear an analyst pose a really challenging question to executives, but in Target's second quarter earnings conference call last week someone did, and the answer, coupled with a later inquiry and response, provides some insight into the retailer's immediate prospects.
Target has been making a lot lately of its move to offer more lower prices and to improve its price perception among consumers even as it adds more food to bring customers into its stores more often. Neil Currie, an analyst for UBS, challenged Target executives on the point. In the conference call, as transcribed by SeekingAlpha, he asked:
Your sales performance particularly when comparing to some other value retailers, like T.J. Maxx, Ross, Wal-Mart, hasn't been as impressive, and I'm a little puzzled as to first of all why you're not getting better sales given that you're a value retailer, and secondly why you're not using the strong gross margin growth [as reported in the conference call] to either reinvest in further price improvements or highlight value more aggressively instead of passing it through to the bottom line. So my two questions are first of all, what's you're impression of why you're not necessarily getting the recognition on value that you deserve, is it perception or reality? And secondly, will you do something about it, and if so, will it be different to what you've done in the past?Gregg Steinhafel, Target's CEO responded:
As I said in my remarks, we are disappointed in our top line performance. Clearly we have a great value proposition, and we want to remain and have been competitive from a price standpoint, So we felt that it was appropriate to reinvest in lower prices. We've done so yet we don't want to go below where the market is.
So some of that savings does go to the bottom line. We've been working very aggressively, trying to find the right and strike the right balance between our expect more pay less marketing message, and its primarily a perception in the marketplace that our value proposition may not be quite as strong as some of the competitors that you've cited.
But our research says that the re-branding campaigns and the broadcasts and the in-store signing are starting to move the needle slightly. We're starting to see slight basis points improvement in our price perception vis-a-vie where we were in prior periods. So we believe that we're on the right track.
We've made the right adjustments. We believe that over time we'll continue to narrow that perception gap.Clearly the answer wasn't definitive, and it may be that Target management is at a bit of a loss and waiting to better gauge customer response to its recent, price-oriented marketing before discussing a more definitive strategy for dealing with the particular difficulty. After all, changing its position too dramatically could hurt the company in a recovery. On the other hand, the lingering nature of the recession -- especially given that unemployment is trialing other indicators and haunting many shoppers even as recovery looms -- probably means that current consumer buying patterns will remain intact at least through the beginning of next year.
In fact, a later question from J.P. Morgan analyst Charles Grom, asking Target executives to flush out comments about improved sales trends in August, particularly as relates to spending on discretionary items, prompted Steinhafel to address what's going on with the company's consumer now and what will likely happen in the immediate future. Again, Steinhafel was careful in his appraisals and suggestive of Target's feeling its way through, when he said:
Well, the commentary is, we are down 6.2 percent same store sales in the second quarter, and so far early reads on back to school are more positive then what we've seen in the past.
A lot of shifting dynamics during the back to school season: some state tax holidays were shifted from July into August. Labor Day moved one week later in the accounting calendar. But overall, we're starting to see some slight strengthening in both the traffic and transaction trends.
But I caution its very, very early and we're going to have to see how the back to school plays out. We think we've put together a real strong back to school, back to college program. We've been very aggressive on price. We believe we will gain market share during this timeframe, and it's our expectation, and we're really planning to have some improvement in our same store sales compared to the last quarter.Douglas Scovanner, Target's CFO, added:
And to your discretionary question, this trend in our discretionary items is less negative so far this month, but I'd reiterate Gregg's caution, we're two weeks down and 11 to go in the third quarter.More on Target's immediate plans to grab the consumer's attention coming up.