Target's Q2 Conference Call Highlights

Target TGT reported its second quarter results Wednesday morning. The retailer earned $0.78 per share, falling short of the consensus estimate by a penny. Revenue of $17.4 billion came in $20 million better than expected.

Contained within Target's quarterly report was a downward revision to its full fiscal 2014 guidance. Target now expects its full year EPS to be in a range of $3.10 to $3.30, down from prior guidance of $3.60 to $3.90.

Following Target's earnings report, the company's CEO Brian Cornell hosted a conference call to further discuss the company's performance in the quarter.

The quarter in review

Kathryn Tesija, Target's Chief Merchandising and Supply Chain Officer described the company's second quarter as being a "transition" as U.S. traffic trends improved and comps increased in the quarter. However, traffic declined year over year along with U.S. comparable transactions which declined 1.3 percent.

U.S. gross margin fell 100 basis points to 30.4 percent due to higher promotional intensity compared to a year ago. Tesija noted that the company felt it necessary to maintain a higher than original expected promotional environment to keep up with its peers.

Hardlines and food sales contributed towards the positive comps, while apparel and home categories were a drag.

Looking forward, Tesija expects the company's full year gross margin rate to be in a range of 29 percent to 30 percent.

Target saw its Canadian gross margin rate decline 1,320 basis points to 18.4 percent while comp sales fell 11.4 percent in Canada. As such, the company's poor performance was a significant factor in downward guidance.

Mulligan did note that the company plans to scale back its promotional intensity over the coming quarter to a more appropriate level.

Digital sales were highlighted by Tesija as being a strong performing category in the quarter. Digital sales including flexible fulfillment rose more than 30 percent from a year ago. Target also saw close to a 50 percent increase in visits from mobile devices, including iOS and Android apps.

Target launched a new ad campaign focusing on millennials that "aims to expand the brand's perception of Target from a brick-and-mortar destination to a total retail experience." The ad focused on the company's three most prominent omnichannel initiatives, including subscriptions, store pickup and cartwheels.

Target opened its first Target Express store in July. The store stands at 20,000 square feet, 15 percent the size of a typical store.

In July, Target launched F Sport, a "lifestyle brand target to appeal to the entire family with offerings in Kids, Men's and Women's."

During the quarter Target Canada engaged in a comprehensive review of its strategy and operations which includes feedback from guests, employees and business partners. Target Canada remains focused on improving pricing and inventory issues that have plagued the company.

Notable Quotes

Brian Cornell on his impression of Target before joining the company:

"As a vendor partner, I've known Target as a smart, savvy, innovative, ethical and guest-focused merchandiser. As a competitor, I've known Target as a disciplined, tough, focused retailer; a company that redefined the discount space by delivering outstanding design, world-class fashion, innovative products and amazing prices. As a guest, my family and I have known Target as a unique place that makes shopping fun. It saves us time and offers a differentiated experience based on newness and discovery. And finally, as a member of the community I've known and admired Target for its commitment to making the places where we live and work better, both through its corporate giving programs and the commitment to volunteerism from our team members."

Brian Cornell on ‘fixing' Target Canada:

"During my very first week I visited the Canadian market to spend time with that team, and I want to be a good student of the business, but clearly, we have to have a sense of urgency here and a sense of pace. And while I want to study the business and certainly and listen and learn from our team, no one is happy with our current performance. And our focus right now is to make sure we've got plans in place in the short term to improve traffic. We've got plans in place to improve our performance in Canada, and we've got to continue to move faster from a digital and mobile standpoint to meet the needs of our guests. So you can expect a clear sense of urgency, but I certainly want to make sure I give myself the time to listen, learn, understand the business both from our team standpoint but also from the eyes of the Target guests. And you can expect me to dive in very quickly to understand the business, to look for the opportunities and to work with the leadership team to develop very focused priorities as we go forward into 2015 and beyond."

Kathryn Tesija on initial success of Target Express:

"Target Express is designed so guests can get what they need and get out quickly. So far, sales at the store have come in as expected and not surprisingly we are seeing much more traffic in a much smaller basket than our chain-wide average. Also as expected, sales have been heavy and food and essentials with a mix of own brand sales in those categories far outpacing the chain average."

Kathryn Tesija on gross margin concerns:

"There's no doubt with e-commerce being as immature as it is, there is some pressure on gross margin. We are committed to going where our guests go and they want to be able to shop online, and we are going to make sure that we've got all the right products for them both online and in our store. So that does give us a little headwind on the gross margin."