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Target's 2Q profit falls 13 pct on shopper caution

By Anne D'innocenzio

Associated Press

Published: Wednesday, Aug. 21 2013 2:50 p.m. MDT

Target Corp. on Wednesday became the latest in a string of companies that have lowered their business expectations as they contend with an uncertain economy.

Andy King, Associated Press

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NEW YORK — Target Corp. on Wednesday became the latest in a string of companies that have lowered their business expectations as they contend with an uncertain economy.

The cheap chic retailer muted its annual profit forecast after reporting a 13 percent drop in second-quarter profit as its expansion into Canada — its first foray outside the U.S.— has proven more challenging than it expected.

But the company also is contending with mixed economic signals that have caused it and its rivals, from Wal-Mart Stores Inc. to Macy's, to temper their forecasts for the remainder of the year. While jobs are easier to get and the housing market is gaining momentum, these improvements have not been enough to get most Americans who are facing stagnant wage growth to spend more freely.

"As we monitor the economy and consumer sentiment, we continue to see a mix of signals in which emerging optimism is balanced with continuing challenges," said Gregg Steinhafel, Target's chairman, president and CEO, in an earnings call with analysts.

Target earned $611 million, or 95 cents per share, in the quarter ended Aug. 3. That compares with $704 million, or $1.06 per share, a year earlier. Excluding certain items related to its expansion into Canada, the retailer earned $1.19 per share.

Total revenue reached $17.12 billion, up 2 percent from $16.45 billion in the quarter. Analysts expected earnings of 96 cents per share on revenue of $17.28 billion, according to FactSet.

Shares fell 3.6 percent, or $2.45, to finish at $65.50.

Revenue at stores open at least a year — a gauge of a retailer's health — rose 1.2 percent. That's below the 1.9 percent analysts had expected.

Like Wal-Mart, Target said that its customers 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.

Target's Steinhafel also pointed out another obstacle that has been repeatedly cited by other retail executives: the shift in Americans spending on bigger ticket items like cars and home improvements and less on things like clothes and shoes.

Target said that sales in less discretionary items like food and health care increased somewhat faster than the company average. But its sales in clothing and consumer electronics declined slightly. Within its clothing business, children's fashions had the strongest results while women's clothing had weaker results.

Adding to that, Target's expansion into Canada, begun earlier this year, has been challenging. 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. Target opened 44 Canadian Target stores during the second quarter, resulting in a total of 68 so far this year.

Steinhafel told investors that the expansion project required a massive effort from teams throughout the company that included developing different merchandise strategies and reconstructing former Zeller store locations.

He noted that while the Canadian stores had seen initial strong traffic, its Canadian customers are buying fashion and home goods but not going to the discounter frequently to buy basic staples like toothpaste.

That has resulted in overall sales and profit momentum building slower than expected, Target executives said. Target said it's continuing to learn, adjust and refine operations in Canada as it prepares to open an additional 56 stores by the end of the year.

Target is not counting on the environment to improve for the rest of the year.

For the current quarter, Target expects earnings per share to be in the range of 80 cents to 90 cents. Analysts projected 89 cents per share, according to FactSet.

For the full year, Target now expects earnings per share to be at the low end of its previous guidance of $4.70 to $4.90. Target said that it expects its costs related to its Canadian expansion will depress earnings by 82 cents, up from its projected 45 cents per share. In May, the company trimmed its projections from the original outlook of $4.85 per share to $5.05, citing cautious shoppers.

Analysts expect $4.29 per share for the full year.

Follow Anne D'Innocenzio on Twitter: www.twitter.com/adinnocenzio

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