BUSINESS

Target's Canada Expansion Hurts 3rd Quarter Income

11/21/2013 07:52 EST | Updated 01/25/2014 04:01 EST
Steve Russell via Getty Images
TORONTO, ON - MARCH 27: Target opens its Danforth location (3003) with a red carpet 'premiere.' featuring Elisha Cuthbert and Sarah Jessica Parker attended and did a little shopping. (Steve Russell/Toronto Star via Getty Images)
Canada's reluctance to embrace Target led to a drop in third-quarter profits for the discount-chic chain, which said expansion costs and worse-than-expected sales were partly to blame.

CEO Gregg Steinhafel told a conference call with financial analysts Thursday that the retailer's gross margins in Canada were unusually low in the quarter as it worked to eliminate excess inventory.

"While our initial sales and profit from Canada have not met or expectations, we remain enthusiastic about the Canadian market and confident in the long-term success of the stores," Steinhafel said.

Target's launch in Canada earlier this year followed months of eager anticipation, but that goodwill dissipated somewhat as customers complained of empty shelves and higher prices than in the U.S.

The company said in August that cautious shoppers and costs associated with the ramp up of its Canadian expansion would likely lead to weaker results for the remainder of the year, but that it was committed to Canada and adjusting and refining operations.

The company opened an additional 31 stores earlier this month and planned to open two more Friday to reach its goal of 124 Canadian Target stores in 2013.

"As we gain experience in operating Canadian stores and accumulate sales histories by item by location, inventory flow and allocation will become much more reliable and accurate, setting the stage for improved sales and operating efficiency in 2014," Steinhafel said.

"We also believe the sales shortfalls and earnings dilution from excess inventory and start up costs will moderate next year leading to significant improvement in the Canadian segment profitability in 2014."

For the three months ended Nov. 2, Target earned US$341 million, or 54 cents per share. That's down 47 per cent from US$637 million, or 96 cents per share, a year earlier.

Removing Canada-related expansion costs and other items, earnings were 84 cents per share.

Analysts expected earnings of 64 cents per share for the Minneapolis company.

Revenue rose two per cent to US$17.26 billion from $16.93 billion. Wall Street expected US$17.38 billion in revenue. Sales at U.S. stores open at least a year rose 0.9 per cent, near the low end of Target's expectations.

Target also lowered its full-year adjusted earnings forecast on Thursday.

The retailer, which sells affordable, trendy clothes and home decor under the same roof as toothpaste and cereal, has experienced choppy business heading into the holiday season, which can account for up to 40 per cent of a retailer's annual revenue.

In addition to its Canadian troubles, Target is also facing problems in the U.S., where many shoppers are grappling with stagnant wage growth.

While the job market is improving and the housing market is gaining momentum, the improvements have not been enough to get most Americans to spend. They also continue to struggle with a two percentage-point increase in the Social Security payroll tax since Jan. 1.

Steinhafel said Thursday the company's U.S. segment executed well despite the fact that "consumer spending remains strained."

Target's results come after its chief rival Wal-Mart Stores Inc. posted results that reflect that its low-income shoppers are still struggling.

It announced last week that a key revenue measure — revenue at stores open at least a year — fell for the third straight quarter in a row. It also cut its annual outlook for the second time in three months and gave fourth-quarter guidance that's below Wall Street's expectations.

— With files from The Associated Press