Target Corp. (TGT:US), the second-largest U.S. discount retailer, said second-quarter profit fell 13 percent as consumers’ caution in the face of higher taxes and unsteady employment restrained sales.
Net income in the quarter ended Aug. 3 dropped to $611 million, or 95 cents a share, from $704 million, or $1.06, a year earlier, the Minneapolis-based company said today in a statement. Analysts projected 95 cents, the average of estimates compiled by Bloomberg. Revenue rose 2 percent to $17.1 billion, trailing analysts’ $17.3 billion projection.
Target joins Wal-Mart Stores Inc. (WMT:US) and Macy’s Inc. (M:US) in reporting results as a bumpy economy and increased Social Security taxes made consumers reluctant to spend on general merchandise, including apparel. By contrast, both Home Depot Inc. and Lowe’s Cos. benefited from a U.S. housing recovery and reported second-quarter profit that topped analysts’ estimates.
Besides taking a hit from the change in tax rates and unpredictable weather, Target competed with “increased spending on durable goods,” Sean Naughton, an analyst at Piper Jaffray Cos. in Minneapolis, wrote in a July 26 note. He rates the shares overweight, the equivalent of a buy.
Profit per share this year will be near the low end of its forecast of $4.70 to $4.90, Target said today. Analysts estimate $4.74. The chain also cut its annual same-store sales forecast to 1 percent versus 2 percent to 2.5 percent previously, Chief Financial Officer John Mulligan said on a conference call with analysts today.
“For the balance of this year, our U.S. outlook envisions continued cautious spending by consumers in the face of ongoing household budget pressures,” Chief Executive Officer Gregg Steinhafel said in the statement.
Other retailers are experiencing those same challenges. Macy’s last week posted its first sales drop since 2010 and its profit trailed analysts’ estimates for the first time since 2007. Wal-Mart said last week that earnings for the rest of the year would be less than it previously expected as consumers were hesitant to make discretionary purchases.
Retailers have attributed the weakness to this year’s 2 percentage point increase in Social Security taxes, which has reduced spending among lower-income shoppers, many of whom live paycheck to paycheck. For a person making $40,000 a year, the extra tax bite is about $15 a week.
Higher gas prices also are sapping shoppers’ buying power. The average U.S. price for a gallon of unleaded gasoline in both June and July was higher than a year earlier and about the same in May, according to AAA.
Still, shoppers are prepared to spend on home improvement. Lowe’s today reported second-quarter profit that topped analysts’ estimates and raised its forecast for the year as the housing recovery fuels spending on remodeling. Home Depot, which reported second-quarter earnings yesterday, said same-store sales surged the most in 14 years.
Some of the drag on Target’s earnings is coming from costs associated with its expansion in Canada, where it added 44 stores in the second quarter, bringing its store count there to 68. Target, which has 1,788 U.S. stores, said the Canadian operations reduced its profit by 21 cents a share in the second quarter and will cut profit by 22 cents in the current period.
“Management guidance for the rest of the year suggested that the environment will continue to be difficult with a greater drag from Canada,” Colin McGranahan, an analyst with Sanford C. Bernstein & Co. in New York, wrote in a note to clients today. He rates the shares outperform, the equivalent of a buy.
The Canadian unit generated $275 million in sales in the quarter and had a $169 million loss before interest and taxes, mostly because of $207 million in startup and operating expenses.
Target fell 3.6 percent to $65.50 in New York. The shares gained 11 percent this year, compared with a 7.8 percent gain for Wal-Mart and a 15 percent increase for the Standard & Poor’s 500 Index.
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