Target cuts annual profit outlook

Target slashed its annual profit outlook as the retailer continues to reel from a massive data breach, a disappointing expansion in Canada and sluggish sales in the U.S.

The nation’s third-largest retailer also said Wednesday that its second-quarter earnings dropped 61.7 percent.

The Minneapolis-based company said it earned $234 million, or 37 cents per share, in the quarter ended Aug. 2, compared with earnings of $611 million, or 95 cents per share, a year earlier.

Revenue rose 1.7 percent to $17.4 billion, slightly above the $17.38 billion estimate from FactSet. Revenue at stores open at least a year was unchanged from a year ago.

Excluding expenses related to the data breach, the company earned 78 cents per share, which was in line with Target’s reduced estimate issued earlier in the month

Analysts expected 79 cents per share, according to FactSet.

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Still, there were encouraging signs in the report. Target said that customer traffic is recovering and monthly sales are improving, with revenue at stores opened at least a year up more than 1 percent in July. That figure is considered a key measurement of a retailer’s operating performance.

The results come three weeks after Target named PepsiCo executive Brian Cornell as its new CEO as the retailer fights to redefine itself to American shoppers.

Cornell, who started his job Aug. 12, marks the first outsider to take the helm at Target. He replaces Chief Financial Officer John Mulligan, who was named interim CEO when Gregg Steinhafel resigned in early May in the wake of the data breach that compromised the credit card and personal information of millions of customers and exposed big security flaws.

But Steinhafel was dealing with other challenges, including a botched expansion in Canada and criticism that Target had lost its magic as a purveyor of trendy affordable fashions and home decor.

The latest results highlight the challenges that Cornell faces. He must wrestle not only with specific problems at Target but also with broader challenges that are facing the economy and the retail industry in general.

Retailers, particularly those who cater to low-income shoppers, are still navigating a slowly recovering economy that hasn’t yet benefited all Americans equally. Stores also face a shifting landscape where mobile shoppers want more flexibility in where and how they buy.

But Target’s problems run deeper. For one, analysts say that Target needs to play catch-up to cater to mobile savvy shoppers by offering more services that fuse its online experience with its physical stores. It’s now testing $10 rush delivery in the Minneapolis, Boston and Miami markets, offering customers the ability to order as late as 1:30 p.m. and receive a delivery of qualifying items between 6 p.m. and 9 p.m. the same day.

Moreover, Target, which created a niche for collaborating with designers for affordable merchandise, also needs to reclaim its status as a purveyor of cheap chic at a time when other stores are copying its formula. At the same time, it still hasn’t been able to ditch the perception that its prices on staples are much higher than other discounters like Wal-Mart.

Target also faces the lingering effects of the breach. The company has responded to the breach by overhauling security and technology. The company has been accelerating its $100 million plan to roll out chip-based credit card technology, which is considered secure, in all of its nearly 1,800 stores.

The company said Wednesday that it incurred gross breach-related expenses of $148 million, partially offset by the recognition of a $38 million insurance receivable in the quarter.

As for Canada, the company is working to revamp its business under its new CEO of Canadian operations Mark Schindele, who replaced Tony Fisher in May. Last week, it outlined key initiatives such as a price-matching program and announced a merchandising partnership with celebrity designer Sarah Richardson.

The company said that gross profit margin in its Canadian operations fell to 18.4 percent from 31.6 percent a year earlier as the company has had to slash prices to get rid of merchandise.

The company said it now expects full-year adjusted earnings to be in the range of $3.10 to $3.30 per share, compared with prior guidance of $3.60 to $3.90. Analysts had expected $3.50 per share.

BY ANNE D’INNOCENZIO, AP Retail Writer