Bloomberg News

Target Lowers Forecast on Sales Slump, Canadian Losses

August 20, 2014

Target Corp. CEO Brian Cornell

Target Corp. Chief Executive Officer Brian Cornell, who on Aug. 12, became the first outsider ever to become chief executive officer of Target. Photographer: Beth Hall/Bloomberg

Target Corp. (TGT:US), still struggling to rebound from last year’s hacker attack, cut its forecast for the year as slumping sales and a money-losing push into Canada take a toll on profit.

Target now expects full-year earnings of $3.10 to $3.30 a share, excluding some items, down from a previous forecast of as much as $3.90, according to a statement today. Analysts had predicted $3.44, the average estimate compiled by Bloomberg.

The bleaker forecast follows a preliminary earnings report on Aug. 5 that fell short of expectations, signaling that the company’s comeback effort will be slow going. Target has been struggling to boost U.S. traffic, repair its botched Canadian expansion and regain shoppers’ trust after hackers stole millions of customers’ data last year. The retailer hired PepsiCo Inc. (PEP:US) executive Brian Cornell as its new leader last month, following the ouster of Gregg Steinhafel in May.

Target is relying heavily on sales promotions to entice shoppers, but it doesn’t seem to be working, said Brian Yarbrough, an analyst at Edward Jones & Co. in St. Louis. That means Target is squeezing margins without much benefit.

“We would like to see those promotions drive more traffic,” he said. “Otherwise it’s a double negative.”

Third Quarter

Target also said that earnings will be 40 cents to 50 cents a share in the third quarter, excluding some costs. That missed the average analyst estimate of 66 cents.

Second-quarter net income fell to $234 million, or 37 cents a share, from $611 million, or 95 cents, a year earlier, the company said today. Excluding some items, the earnings were 78 cents a share, matching the figure it gave on Aug. 5. Before that report, the Minneapolis-based company had projected 85 cents to $1 for the period, which ended Aug. 2.

While comparable-store sales were unchanged in the U.S. last quarter, they decreased 11 percent in Canada. Target blamed the drop on the fact that the locations had grand-opening events in 2013, generating traffic that was hard to match this year. The Canadian business lost $204 million before interest and taxes in the period, compared with a $169 million deficit a year earlier.

Canadians, who for years shopped at Target just over the border in the U.S., have been unimpressed by its expansion into the country. They found prices at the local stores were higher, while the retailer failed to keep enough merchandise in stock. Target, which hired a new leader to run the operation, said this month it will begin matching rivals’ prices and improving its supply chain in a bid to change that impression.

Resurgence Ahead?

U.S. traffic began to rebound in July and have continued to improve in August during early back-to-school shopping, said Chief Financial Officer John Mulligan, who served as interim chief executive officer before Cornell was hired.

“While results from the quarter didn’t meet our expectations, we are seeing some early signs of progress as we work to improve results in the U.S. and Canada,” he said in the statement.

The stock gained 1.8 percent today to close at $60.33 in New York. It has fallen 4.6 percent this year, compared with a 4.7 percent drop for Wal-Mart Stores Inc. (WMT:US) and 7.5 percent gain for the Standard & Poor’s 500 Index.

Target relied more heavily on promotions last quarter to fuel sales, which lowered its gross margin to 30.4 percent from 31.4 percent a year earlier. Still, cost cutting helped reduce its selling and overhead costs, the company said.

Hacker Attack

The company also said it had $148 million in breach-related expenses in the quarter, including money set aside to cover existing and potential claims related to the data theft. Those expenses were partly reduced by $38 million in insurance.

Hackers struck the company last year during the height of the holiday shopping season, tarnishing its reputation and hampering sales. Steinhafel held himself personally responsible for the breach, contributing to his ouster as CEO this year.

On Aug. 12, Cornell became the first outsider ever to take the reins at Target. In the past three decades, he’s worked for at least six different companies, including PepsiCo, Wal-Mart, Michaels Stores Inc. and Safeway Inc. (SWY:US)

As part of his turnaround effort, Cornell is working to boost Target’s e-commerce orders. So far, though, Internet sales aren’t enough to make up for the slowdown at brick-and-mortar stores, Yarbrough said.

“Online sales are growing nicely, but it’s still a small piece of the pie,” he said.

To contact the reporter on this story: Renee Dudley in New York at rdudley6@bloomberg.net

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net


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Companies Mentioned

  • TGT
    (Target Corp)
    • $61.67 USD
    • 1.38
    • 2.24%
  • PEP
    (PepsiCo Inc)
    • $93.78 USD
    • 0.23
    • 0.24%
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