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Target misses the mark as third-quarter earnings fall short

by Sydnie Abel
Nov 21, 2013

City Target

Sydnie Abel/MEDILL

Target missed the mark for third quarter earnings with net income falling 46 percent due in part to start up costs for its 124 new Canadian stores.

Target Corp. shares tumbled Thursday after the Minneapolis-based retailer said net income dropped 46 percent in the third quarter. Start-up costs for new Canadian stores and a wary U.S. consumer were a drag on earnings.

The company also lowered its outlook for full-year 2013 earnings per share.

Net income fell to $341 million, or 54 cents per diluted share, compared with $637 million, or 96 cents per diluted share in the year-ago period.

Target’s barely year-old Canadian segment dragged down overall adjusted earnings, which missed the analysts’ consensus estimate of 62 cents per diluted share, according to Bloomberg LP.

Revenue in the quarter rose 1.9 percent to $17.24 billion from $16.93 billion a year ago.

“A meaningful portion [of customers] indicated they were changing their shopping behavior in light of their current financial situation,” said Kathryn Tesija, executive vice president of merchandising in a conference call.

“We even heard from some guests that they were cutting trips [to the store] for fear they would be tempted to spend too much, a behavior we first observed in the recession,” she said.

Comparable sales, or sales at stores open for more than a year, increased 0.9 percent in the quarter. But categories with higher profit margins, such as apparel and home goods, declined and Halloween merchandise did not sell as well as the company expected, especially among lower and middle-income households.

Target lowered its full-year earnings outlook to $3.52 compared with the previous estimate of between $3.75 and $3.95. Target said it expects fourth quarter earnings of around $1.26 per diluted share, far below the analysts’ current consensus of $1.41, according to Bloomberg.

Target has opened 124 Canadian stores in 2013, including 31 stores in November alone, Steinhafel said. Excess inventory in these stores led to heavier third-quarter markdowns on products and lower-than-expected sales and profits.

While executives are confident that start-up expenses in Canadian stores will begin to level out in coming quarters, “we see continuing earnings risk in Canada,” said Mark Miller, an analyst at William Blair, in a note Thursday.

“Management’s comment that ‘third‐quarter results reflect continued strong execution in our U.S. segment’ is a stretch, in our view,” Miller said. “Although we believe that Target’s woes are exacerbated by competition (and the economy) more than underlying execution.”

Target’s net income for the first nine months of 2013 fell 29 percent to $1.45 billion, or $2.26 per diluted share, from $2.04 billion, or $3.09 per diluted share, in the year-ago period.

Revenue in the first nine months rose just 1 percent to $51.1 billion from $50.58 billion a year ago.