Target CEO says store's stocking problems are "unacceptable"

As Target Corp. continues to draw more shoppers and sales, the Minneapolis-based retailer has been slipping in some of the basics — such as keeping items in stock.

Chief Executive Brian Cornell pointed out several operational challenges heading into the latter part of the year, after the company on Wednesday reported stronger-than-expected second-quarter results.

"Over time, Target has developed an incredibly complex supply chain built to serve an outdated, linear model in which products flowed from vendors through distribution centers to stores," he told analysts on a conference call.

But today, he said, that flow has been disrupted by online shopping, and the company sends products to customers' doorsteps directly from distribution centers or stores.

"Frankly, as a result, some retail fundamentals have started to suffer," he said. "Specifically, in-stocks in our stores have been unacceptable so far this year. Our guests deserve better."

That is one reason he tapped John Mulligan, the company's chief financial officer who also served as interim CEO before Cornell arrived last summer, to take on the new role of chief operating officer.

Mulligan told analysts, "It will always be a challenge to be in stock on every item in every store in every moment of every day."

But he vowed to begin looking for quick fix and long-term solutions to improve the supply chain amid the fast-changing retail landscape. Staying in stock across a massive chain of stores has always been a challenge that even Wal-Mart Stores Inc., the world's largest retailer, has struggled with over the years. And it was one of the main reasons why Target's foray into Canada failed earlier this year. Target closed its 133 Canadian stores after shoppers were turned off by empty stores shelves, among other issues.

Its stores in the U.S. have been on a roll, however, and the company reported its third consecutive quarter of growth in store traffic and fourth consecutive quarter of growth in same-store sales.

That momentum will face a new challenge as Target's results come up against stronger comparisons starting now in the current August-through-October quarter, the third of its fiscal year. Executives said they expect same-store sales to grow in the 1 to 2 percent range during the period, below the 2.4 percent in the second quarter.

Adjusted for one-time items such as the closing of its Canadian stores, Target's per-share profit in the second quarter was $1.22, well above the $1.11 analysts expected. Those results were helped in part by moving some marketing expenses to the third quarter as well as initiatives to shave off $2 billion in expenses out of the retailer over the next two years.

Executives also emphasized that the focus on its signature categories of baby, style, kids and wellness have been paying off, with those categories growing three times the rate of other product categories. Mulligan singled out swimwear, a recently-revamped denim selection, toys and back-to-school items as some of the bright spots. Overall revenue rose 2.8 percent in the quarter to $17.4 billion.

Online sales rose 30 percent, slower than the 40 percent rate executives set as a goal earlier this year.

Target's results come on the heels of Wal-Mart reporting less rosy second-quarter results on Tuesday. Wal-Mart's quarterly profit fell 15 percent and the company lowered its earnings targets for the year as it spends more to raise the hourly wages of its workers and invests in customer service and its online operations.

Kavita Kumar • 612-673-4113