By Paul Ziobro
Target Corp.'s profit fell 16% as the retailer ramped up
discounts to win shoppers back after its massive data breach and as
losses mounted at its Canadian operation, highlighting the depths
of the challenges that forced out Chief Executive Gregg Steinhafel
earlier this month.
Cutting earnings guidance for the year, Target said it needs to
swiftly fix its most pressing issues, namely lackluster U.S. sales
in the face of a year and half of declining store traffic, a
botched entry in Canada and a weak website that can't hold its own
against online giant Amazon.com Inc. To do that, it is going to
have to spend more on running promotions, fixing its supply chain
and setting up new ways to ship online orders.
Those challenges currently fall to John Mulligan, Target's chief
financial officer and interim CEO, who stressed the urgency to move
quickly to fix problems. In the U.S., by far its most important
business, Mr. Mulligan needs to get back to its core of offering
hot products to shoppers at low prices, a onetime strength that
Target's strayed from of late.
"We need to improve on what we've done historically well," Mr.
Mulligan said Wednesday during a call with reporters. "While the
environment is challenging, we can do better."
Target is in the process of recruiting a new CEO after Mr.
Steinhafel's resignation.
So far this year, Target has been focused on getting shoppers
back into its store. The drop in store traffic has been a byproduct
of a data breach that hit the retailer over the holidays, when
thieves stole 40 million payment-card numbers and personal
information of 70 million shoppers. To lure consumers back, the
retailer is offering some of the biggest discounts in a decade on
items like 12-packs of Coca-Cola cans, but its gross margin shrank
as a result. It plans to continue such deals throughout the
year.
Target's U.S. sales grew slightly to $16.7 billion, but at
stores open more than 13 months, sales slipped 0.3%. Traffic fell
2.3%, but sales of higher ticket items like mobile devices helped
soften the blow. While sales of electronics, food and beauty
products rose slightly, apparel and home-product sales fell.
The results come against the backdrop of continued weak U.S.
retail sales, which rose just 0.1% in April, according to the
Commerce Department. Other retailers from Macy's Inc. to Kohls
Corp. have reported drops in sales and traffic for the quarter, and
Wal-Mart Stores Inc. warned sales will continue to slide. American
Eagle Outfitters Inc. Wednesday said it plans to close 150 stores
in the next three years.
North of the border, Target's nascent push into Canada continued
to disappoint. Sales of $393 million came in below its own forecast
of at least $400 million made in February as inventory and pricing
issues continued to deter Canadian shoppers. Target now expects
sales in Canada of $2 billion this year, more than $600 million
below its projection last quarter.
Target racked up another $211 million in losses in Canada during
the period, bringing total losses there to around $1.6 billion,
after opening its first stores there last year.
Target is taking steps to fix the unprofitable Canadian
operation, where it expects higher costs and lower margins this
year. On Tuesday Target replaced its Canada president and the
company also plans to name a nonexecutive chairperson to advise the
business and try to salvage Target's first expansion outside the
U.S. Like in the U.S., the Canadian stores also are cutting
prices.
For the quarter ended May 3, Target reported a profit to $418
million, down from $498 million a year earlier. Total revenue
increased 2.1% to $17.05 billion.
Target's shares rose 1% Wednesday and are down shares 16% over
the past year.
The retailer took on another $18 million of expenses related to
the data breach that hit the retailer over the holiday, after
deducting $8 million received from insurance to cover it. That
comes on top of the $17 million of data breach-related costs the
retailer recorded in the fourth-quarter after accounting for
insurance proceeds.
Mr. Mulligan said the company won't have a better handle on
costs related to the data breach until the second half of this
year.
Write to Paul Ziobro at Paul.Ziobro@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires