Canadian expansion weighs down Target,
Chain’s profit drops 47% in Q3 due to higher costs and lower sales
Target Canada’s business is showing signs of improvement, but its U.S. parent is still feeling the headache from its new offspring’s merchandise hangover.
Minneapolis-based Target Corp. saw its third-quarter net income dive a bigger than expected 47 per cent as the mass merchant continued to shoulder expansion costs in Canada.
The retailer faced a harder than expected slog in this country after it began opening stores in March, surprising some customers for not matching its U.S. stores’ prices and missing its initial sales projections. Target also discovered too many of its Canadian customers buy goods regularly at multiple retailers instead of using Target as a one-stop shopping destination.
“We still had inventory that we had committed to from overseas that was basically shipped to Canada, and once we landed it, we realized our sales were under expectations and now we need to do what we can to get rid of that inventory,” Target Canada president Tony Fisher said Thursday.
Opening the final two of 124 Canadian stores this year on Friday, Target has been clearing out excess home and apparel items “so we can start 2014 in a much healthier position,” he said.
The Wal-Mart rival saw lower than anticipated Canadian sales of $333 million US and lowered its full-year adjusted earnings forecast. Canadian operations reduced Target’s earnings per share by 29¢ in the third quarter and the company’s first division outside of the U.S. more than doubled its operating loss compared with the second quarter, to $238 million.
Nevertheless, executives remain optimistic about the division and Target is still sticking by its goal of reaching $6 billion in annual sales and 80¢ in annual earnings in Canada by 2017.
For the three months ended Nov. 2, Target Corp. earned $341 million, or 54¢ per share, compared with $637 million, or 96¢ per share, in the same period a year ago. Analysts were anticipating earnings of 64¢ per share.
Excluding Canadian-related costs and other items, the Minneapolis-based mass merchant earned 84¢ per share.
Revenue rose two per cent to $17.26 billion from $16.93 billion, below analysts’ expectations of $17.38 billion. Sales at U.S. stores open at least a year, a key industry metric known as same-store sales, rose just 0.9 per cent.
The quarterly gross margin rate of 15 per cent in the Canadian segment was also lower than expected, executives said, and they anticipate continued margin pressure in the fourth quarter.
“Over the long-term our expectations haven’t changed at all,” for Canada, CEO Gregg Steinhafel told a conference call with analysts, saying the executive team had “rebooted” early forecasts for this market.
Under that revised metric, the unit’s current performance is now better than expected in the first group of stores to open here now that executives have a better handle on Canadian consumer shopping patterns and preferences.
Once the excess inventory is cleared, “we are very confident that we are going to be back in the mid-30s in terms of the overall gross margin,” he said.
Fisher said Target is making its biggest Canadian marketing investment to date this quarter, a “full court press” in flyer, online, television, outdoor and its discount loyalty card advertising.