Target earnings slump on Canada, data breach woes

Target Wednesday reported a big earnings drop and lowered its forecast as the slumping chain again felt the weight of poor sales in Canada, a huge customer data breach and heavy discounting.

Target, which has 1,795 stores in the US and 130 in Canada, notched second-quarter earnings of $234 million, down nearly 62 percent from the year-ago period. Revenues rose 1.7 percent to $17.4 billion.

The big drop in profits is the latest sign of weakness at Target, which competes in North America with the far-larger Walmart in selling low-priced clothing, groceries, housewares and other goods.

Brian Cornell, who replaced Gregg Steinhafel this month as chief executive in the wake of the data scandal, told analysts he was eager to join a company that "redefined the discount space" by marketing quality goods at low prices.

Cornell's near-term goals include overhauling Canadian operations ahead of the year-end holiday shopping season. Cornell previously worked at PepsiCo and Walmart unit Sam's Club.

The Canada arm lost $204 million in the quarter, in part due to lower gross margins from ongoing efforts to clear excess inventory, Target said. Same-store sales in Canada tumbled 11.4 percent.

Chief financial officer John Mulligan said the Canada performance "remains unacceptable."

Analysts attribute Target's woes in Canada to an excessive number of stores and supply-chain problems that resulted in an inventory mismatch to demand. Some analysts have speculated Cornell might ultimately decide to exit the country.

-Data breach costs mount-

Target's earnings were also dragged lower by additional costs associated with its data breach last winter, one of the biggest hacking episodes in retail history.

Target disclosed last December that hackers gained access to credit card data for 40 million customers and to additional personal and identification information for 70 million other customers.

The disclosure, made at the height of the holiday shopping season,scared off shoppers and forced the company to shell out millions in credit-card claims and identity-theft protection services to customers.

In the most recent quarter, Target spent $148 million in gross breach-related expenses, offset in part by $38 million in insurance recoveries. Since the data breach was disclosed, Target has spent $236 million in all, offset by $90 million in insurance payments.

Besides its own problems in Canada and with the data breach, Target is also contending with a tough retail environment in its home market as stores discount aggressively to compete for customers in the slow-growth US economy.

Comparable store sales in the US were flat compared with last year at Target. Rival Walmart also reported flat US comparable sales last week.

Target executive vice president Kathryn Tesija said "shoppers are still cautious and focused on deals."

Like Walmart, which lowered its full-year profit forecast last week, Target cut its 2014 adjusted profit outlook. The company now forecasts adjusted earnings of $3.10-$3.30 per share, down from $3.60-$3.90.

Analysts noted that Target's report contained a few hopeful notes, such as an improvement in US comparable store sales later in the quarter, a trend that continued into August.

Despite these " encouraging nuggets," the "negatives outweigh the positives" in the latest earnings report, said a note from Sterne Agee.

But BMO Capital Markets said the better US results later in the quarter "give us greater confidence" the company can return to comparable store sales growth in the third quarter.

Many of Target's problems over the last two years are "self-inflicted" and their repair are "straightforward and correctible over the next 12 months," BMO said.

At midday, Target shares were up 1.1 percent to $59.92.