Target feels pain of bargains in tough economy

Target continues to struggle to bounce back from a massive security breach last year, but its latest earnings report, released Wednesday morning, shows that the shopping habits of low- and middle-income consumers may be a bigger problem.

Chief Financial Officer John Mulligan said that the “vast majority” of Target shoppers who came to the store before the breach have returned to their stores, a sign that the company is slowly rebuilding trust after the cyberattack exposed millions of consumers’ credit card data. But Mulligan noted that its shoppers have remained deal-conscious and cautious about spending money amid the tepid economic recovery. That forced the Minneapolis-based company to offer more discounts in the second quarter than it planned to, which in turn ate into its profit margins.

Target’s revenue increased 1.7 percent in the second quarter, to $17.4 billion, but profit plunged nearly 62 percent, to $234 million.

Mulligan said he expects the company to return to what it considers a more normal cadence of promotions later this year, even though he acknowledged that customers are likely to continue to focus on savings. Mulligan said back-to-school shopping at Target has so far appeared to be relatively strong in August, though those sales would not be reflected in this latest report.

Target’s chief rival, Walmart, noted similar challenges in its earnings report last week, which showed the company with flat U.S. sales. Meanwhile, both big-box stores are also facing competition from smaller retailers such as Dollar General, Family Dollar and Dollar Tree. But with wages remaining stagnant for low- and middle-income workers, all those outlets are fighting for a cohort of consumers who have limited dollars to spend and are hunting for cheap prices.

Amy Koo, a senior analyst with Kantar Retail, said that Target’s struggle with low- and middle-income consumers may also be tied to its focus on wealthier consumers in the wake of the recession. (She points to Target’s 2012 holiday collaboration with Neiman Marcus as a clear reflection of that approach.) Now that a recovery is underway, “they might have misjudged how much they could extract from those higher-end shoppers,” Koo said.

The earnings results underscore the scale of the challenges faced by new chief executive Brian Cornell, a former PepsiCo executive who took the helm of Target this month, replacing the ousted Gregg Steinhafel.

Target has undertaken a flurry of measures to try to strengthen a reeling company. It announced in August that it would experiment with extended hours at many of its U.S. stores, with hundreds of shops open until 11 p.m. and hundreds more open until midnight. In July, it opened its first TargetExpress store, a format that is about 15 percent the size of a typical Target store and could allow the chain to get better penetration in urban markets. Chief Merchandising and Supply Chain Officer Kathee Tesija told investors Wednesday that so far the shopping patterns in TargetExpress are shaping up as expected: There is greater foot traffic than in a regular-size Target store, but customers are buying fewer items.

It also recently unveiled a turnaround plan for its nascent international business. Target made its first push outside of the U.S. last year, opening more than 100 stores in Canada. But the company acknowledged that its launch there has been dogged by problems with its supply chain and product selection. The company is pushing to provide merchandise in its Canadian stores that is only offered in the U.S. stores.

While shoppers appear to be returning to Target, America’s fourth-largest retailer is still dealing with some fallout from the cyberattack. The company said the data breach has cost it $146 million so far. Target also has seen a slowdown in applications for its REDcard debit cards since the breach.

After initially plunging when the markets opened, Target’s stock rose nearly 2 percent on Wednesday, to $60 a share.