Target's 2Q results to offer clues on consumers

NEW YORK (AP) -- Target Corp.'s second-quarter financial results Wednesday should offer insight into how its shoppers are dealing with higher payroll taxes and other financial issues.

WHAT TO WATCH FOR: Target, which sells cheap, trendy clothes and home decor under the same roof as toothpaste and cereal, is expected to offer clues as to how its back-to-school selling season is faring. Analysts will also be looking for the discounter's assessment on the rest of the year.

The back-to-school shopping period is the second-largest selling period behind the winter holidays and serves as an indicator of how shoppers will behave for the rest of the year.

In the U.S., while jobs are easier to get and the housing market is gaining momentum, these improvements have not been enough to get most Americans to spend. Many shoppers are grappling with stagnant wage growth. On top of that, Americans continue to struggle with a 2 percentage-point increase in the Social Security payroll tax since Jan. 1. That means take-home pay for a household earning $50,000 a year has been sliced by $1,000.

Analysts also point out that some shoppers are shifting their spending toward bigger-ticket items like autos and houses as they feel more confident about taking on more debt. But that shift is leaving less to spend on nondiscretionary items like clothing.

Target's results come after several retailers including Wal-Mart Stores Inc. and Macy's Inc. offered disappointing results and bleaker outlooks, citing shoppers' reluctance to spend. Macy's executives noted that its weak results were also due to consumers choosing to make purchases in non-department store categories such as cars, housing and home improvement.

Wal-Mart Stores Inc., the world's biggest retailer, issued an earnings report Thursday that intensified worries about the strength of U.S. consumers. The Bentonville, Ark.-based discounter said it expects economic strains in the U.S. and abroad to squeeze its low-income shoppers the rest of the year.

That doesn't bode well for Target, whose customers overlap with Wal-Mart.

Target, whose sales growth has been uneven since the recession, has been seeking ways to pull in new shoppers.

Target has reached out to customers with two big growth initiatives. It has been offering a larger selection of food and also a program, started in 2010, that gives shoppers a 5 percent discount when they pay with Target-branded credit and debit cards.

At the same time, Target continues to team up with new designers for limited-time partnerships. Next month, Target is set to launch its latest designer collaboration, with Phillip Lim.

Last year, Target expanded into urban markets using smaller versions of its big-box stores in Seattle, Los Angeles and Chicago. Analysts will want to know how the new locations are faring.

But analysts believe that Target needs to do even more to pull in shoppers given a challenging environment.

"We hope to hear about tangible steps, indicating a sense of urgency, that (Target) is taking to invigorate growth and counter the numerous secular issues it's facing including pressures from (Amazon), " Faye Landes, an analyst at Cowen and Co., wrote in a report released to clients on Friday.

Target also started to expand into Canada earlier this year, its first foray outside the U.S. The company is opening the stores in waves that should add up to about 125 stores at locations once owned by Canadian retailer Zellers by the end of the year. Analysts will want to hear more details on Target's performance in Canada and how it plans to address the intensifying competition in the country.

WHY IT MATTERS: Target's size, its sweep across American consumer markets and its broad offerings make it a barometer of consumer spending, which is an important part of the U.S. economy.

WHAT'S EXPECTED: For the second quarter, analysts on average expect the Minneapolis-based chain to report 99 cents per share on revenue of $17.29 billion, according to FactSet.

LAST YEAR'S QUARTER: A year ago, Target earned $1.05 per share on revenue of $16.73 billion.