Target shares plunge after sales, outlook disappoint

CHICAGO (Reuters) - Retail chain Target Corp TGT.N gave a cautious outlook on Wednesday after reporting a lower-than-expected increase in quarterly sales due to unseasonable weather and weaker demand for electronics and groceries.

Target shopping carts a shows outside a newly constructed Target store in San Diego, California May 17, 2016. REUTERS/Mike Blake

Shares of the company fell as much as 11 percent, their biggest intraday decline since December 2008, as investors focused on weaker revenues and a poor outlook despite higher-than-expected earnings.

Target's woes also encouraged investors to sell shares of rival retailers like Macy's M.N., JC Penney JCP.N and Wal-Mart Stores Inc WMT.N on Wednesday. Wal-Mart is due to report quarterly results on Thursday.

Target is the latest traditional brick-and-mortar chain to report disappointing sales as traditional chain stores spend more at online merchants like Inc AMZN.O and as slowly rising wages enable consumers to spend more on big-ticket purchases like cars and home improvements.

“We’re approaching our business with appropriate caution as sales trends at Target and many of our key competitors (have) weakened,” Chief Executive Officer Brian Cornell said on a conference call.

He said he expected price discounting to intensify as retailers try to shed excess inventory after a slow season.

Target said apparel sales rose during the quarter and were stronger than other retailers’, but unseasonable weather hurt demand.

In addition, the company’s grocery division suffered from a reorganization that increased organic and fresh food offerings but made it harder for customers to find products.

The sixth-largest U.S. retailer said customers made larger “pantry-stocking visits,” but growth in smaller “convenience trips” slowed, highlighting a new challenge for chains like Target that have bet on small format-stores for future growth.

Target said sales at stores open at least a year rose 1.2 percent in the first quarter ended on April 30, missing market expectations for a 1.6 percent increase, according to research firm Consensus Metrix.

Net sales fell 5.4 percent to $16.2 billion, mainly due to the sale of the pharmacy and clinic business to CVS Health Corp CVS.N. Analysts on average had forecast $16.32 billion, according to Thomson Reuters I/B/E/S.

Digital sales increased 23 percent, compared with a year-earlier rise of 38 percent, and accounted for 3.5 percent of the company’s total.

Target said second-quarter comparable sales would be flat to down 2 percent even though it was confident that it would meet its earnings outlook of $1.00 to $1.20 per share before special items.

Analysts blamed the first-quarter performance on short-term weakness in the sector and expressed confidence about Target’s growth prospects and Cornell’s turnaround strategy.

Neil Saunders, managing director of research firm Conlumino, said the comparable sales were not “spectacular” but nonetheless were “a testament to Target’s relative strength” because they remained in positive territory.

Net income fell to $632 million from $635 million a year earlier.

Excluding restructuring charges and gains from the CVS deal, earnings were $1.29 per share, better than analysts expectations of $1.20 per share.

Reporting by Nandita Bose in Chicago; Editing by Lisa Von Ahn