Target profits dragged down by Canadian expansion, wary shoppers

Target Corp. is reporting a 13 per cent drop in second-quarter earnings as the discount retailer spent money on opening stores in Canada and dealt with cautious shoppers in the United States.

The Minneapolis-based retailer, which began entering the Canadian market for the first time in March and had 68 stores in the country by the end of the second quarter, is offering a muted full-year outlook.

"For the balance of this year, our U.S. outlook envisions continued cautious spending by consumers in the face of ongoing household budget pressures," said Target chief executive and chairman Gregg Steinhafel.

"In Canada, where we are only five months into our market launch, we continue to learn, adjust and refine operations in our existing stores as we prepare to open another 56 stores by year-end."

Target estimates its third quarter adjusted earnings per share will be between 80 and 90 cents US and net income will be between 55 cents and 65 cents. The adjusted EPS excludes 22 cents related to Canadian operations and three cents related to a non-operating asset in the third quarter.

The company also says its 2013 full-year adjusted earnings will be near the low end of its previous guidance of $4.70 to $4.90 per share.

Shares in the company dropped $2.45 or 3.61 per cent in the New York Stock Exchange Wednesday, closing at $65.50.

Bumpy start for Canadian stores

Target has hit some bumps along the way of its Canadian expansion and tries to assess the needs of shoppers outside its home market.

Although Target's international move has been anticipated since it agreed to move into many of the stores formerly occupied by Zellers, the Canadian launch has apparently missed the mark for many Canadian shoppers.

It began with some rumblings when Target was criticized during its unofficial "soft openings" for running out of some products as it tried to keep up with demand. Some customers also complained about pricing they considered too high.

A recent survey by Forum Research, a market research firm, found only 27 per cent of those polled indicated they were "very satisfied" with their experience at Target.

That was below Target's score in Forum's previous survey, when 32 per cent of those polled indicated they were "very satisfied" with their experience at the discount retailer.

The company also came in behind Hudson's Bay Co. and Costco Wholesale Corp. (Nasdaq:COST), where 40 per cent and 62 per cent of respondents polled last week reported they were "very satisfied" with their shopping experience at each store in the past 12 months, respectively. The telephone survey of a random sample of more than 1,500 Canadians on Aug. 14, is considered statistically accurate to plus or minus three per cent, 19 times out of 20.

Canadian operationsreduce earnings

Target earned $611 million, or 95 cents per share, in the quarter ended Aug. 3, compared with $704 million, or $1.06 per share, a year earlier.

Excluding items, the retailer earned $1.19 per share. Target said its Canadian segment accounted for 21 cents of unusual items during the second quarter.

Total revenue reached $17.12 billion, up two per cent from $16.45 billion in the quarter. The Canadian segment generated $275 million of the revenue.

Analysts had estimated Target's earnings would be 96 cents per share on revenue of $17.28 billion, according to FactSet.

Revenue at Target stores open at least a year rose 1.2 per cent, below the 1.9 per cent analysts had expected.