Target Q2 Profit Hit by Canadian Expansion, Softer Sales

In Industry News, Reports, What's New by Jeff PrineLeave a Comment

Target logoMinneapolis—Target Corp.’s second quarter profit edged past expectations today but the costs of its Canadian expansion and spend-thrift consumers is taking its toll on its full year profits.

For the quarter ended August 3, the mass merchant giant posted a 10.4% drop in its net profit to $611 million, or 95 cents a share, compared with a profit of $704 million, or $1.06 a share, a year earlier. Excluding one-time items but including the 21 cents a share cost to open its Canadian stores, adjusted earnings were $1.12 a share. Analysts’ average estimate expected 96 cents a share. (Analysts’ estimates typically exclude one-time items.)

Net revenue increased 4% to $17.12 billion, but missed analysts’ target of $17.26 billion in sales. Comparable store sales were up 1.2%, below analysts’ estimate of a 2.1% increase and below the company’s own forecast of a 2% to 3% gain.

In its U.S. division, Target’s sales were up 2.4% to $16.8 billion, reflecting a 1.2% rise in comparable sales combined with the contribution from new stores.

‘Ongoing Household Budget Pressures’

The new Canadian division generated $275 million in sales and had a $169 million loss before interest and taxes, due mostly to the $207 million in startup and operating expenses. The first of 124 stores planned this year in Canada opened in March and the company hopes to add a slight profit by fourth quarter.

Similarly to comments Walmart and Macy’s Inc. made last week, CEO Gregg Steinhafel said he expects U.S. shoppers to remain cautious “in the face of ongoing household budget pressures.” Indeed Target noted that back-to-school purchases have tended toward higher-price merchandise while sales have softens for more incidentals.

In May, Target had trimmed its full year adjusted earnings forecast to $4.70 to $4.90 a share from $4.85 to $5.05 as a result of shoppers’ slowdown. Now the company says its per share earnings will be near the low end of its May forecast. Analysts’ average estimate expects $4.74 a share.

Target also revised downward its comparable store sales forecast to 1% instead of its previous 2% to 2.5%, Chief Financial Officer John Mulligan said.

While so far only TJX Cos. and some home improvement chains have shown strength in the second quarter. “The rest of retail is sluggish at best,” said Shawn Kravetz, president of Esplanade Capital LLC, which owns Target shares. “Walmart and others made it crystal clear that it is a little bit tougher out there, so that shouldn’t be a surprise to anyone.”


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