Target's 1Q profit drops 29 pct on weak sales

Published: Wednesday, May 22 2013 12:30 p.m. MDT

In this July 28, 2012 photo, shopping carts sit parked outside a Target store in Marlborough, Mass.

Bill Sikes, Associated Press

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NEW YORK — Target Corp. reported a 29 percent drop in first-quarter profit as unusually cool spring weather and financial pressures chilled customers' appetite for spending.

The company, based in Minneapolis, also on Wednesday cut its annual profit outlook, sending its stock down.

Target is the latest in a string of companies including rival Wal-Mart Stores Inc. that say bad weather and financial pressures like the higher payroll tax have squeezed business in the first couple months of the year.

While chilly weather was a big factor in depressing sales of spring clothing and other seasonal goods, Target said that a yo-yo economic recovery has continued to make shoppers stick to shopping lists and plan their spending.

"We remain cautiously optimistic about both the macroeconomic environment and consumer behavior," Gregg Steinhafel, chairman, president and CEO, told investors in a call after the earnings report. "Both of these business drivers continue to reflect slow, uneven growth and ongoing cross-current of positive and negative indicators, just as they have for the past few years."

In fact, while the housing market is showing signs of recovery and claims for unemployment insurance have been declining, shoppers, particularly younger customers, are still facing a weak job market, Steinhafel said.

A big hurdle for many low-price retailers has been tax changes. An increase in the payroll tax of two percentage points, which took effect Jan. 1, means that take-home pay for a household earning $50,000 a year has been sliced by $1,000.

Target said Wednesday that three-quarters of its customers surveyed were aware of this year's payroll tax increase. Among those, a majority have noticed the impact of the tax increase on their paychecks and indicate it's affecting their spending.

Still, Target, whose sales growth has been uneven since the recession, remains confident in its strategies to attract 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. Earlier this month, Target announced its latest designer collaboration, with Phillip Lim. The collection is due out in September.

Last year, Target expanded into urban markets using smaller versions of its big-box stores in Seattle, Los Angeles and Chicago.

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. During the first quarter, it opened 24 stores in Canada, and plans to open 20 more later in the second quarter.

Target said it earned $498 million, or 77 cents per share, for the three months ended May 4. That compares with $697 million, or $1.04 per share, a year earlier.

Excluding items related to its Canadian expansion and retirement of certain debt, the company earned $1.05 per share.

Sales rose 1 percent to $16.71 billion.

Analysts had expected earnings of 95 cents per share on revenue of $16.82 billion.

Revenue at stores open at least a year slipped 0.6 percent as the number of transactions fell 1.9 percent. That's considered an important measure of retail performance because it strips out the effect of stores that open or close during the year.

Target says that measure should improve to anywhere from a 2 percent to 3 percent gain in the current quarter. And while traffic should improve, it will continue to be challenging, Target told investors.

Target expects that adjusted earnings per share will be in a range between $1.09 and $1.19 for the current quarter.

For the full year, the company now expects $4.70 per share to $4.90 per share. That's down from its original guidance of $4.85 per share to $5.05 per share.

Analysts had forecast $1.11 per share for the second quarter and $4.63 per share for the year.

The results come a week after Wal-Mart, the world's largest retailer, reported that its first-quarter profit edged up just slightly, and the company struggled with a sales malaise in its namesake business.

Revenue at stores open at least year at its namesake U.S. business dropped 1.4 percent, the first decline since the second quarter of 2011.

Wal-Mart also offered a quarterly profit outlook that came below Wall Street's projections. Wal-Mart blamed a litany of factors affecting its budget-conscious customers, including a payroll tax increase, delayed tax refunds, job worries and bad weather. The company did say that sales this month have been rebounding.

Target's stock dropped nearly 4 percent, or $2.69, to $68.56 Wednesday.

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