Target cuts annual profit outlook

NEW YORK — Target Corp. slashed its annual profit outlook as the discounter continues to reel from costs related to a massive data breach, a botched 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. Excluding expenses related to the data breach, the results were a penny short of Target's reduced estimate issued earlier this month.

Still, there were some encouraging signs. Target said that customer traffic, which fell sharply right after the breach was disclosed, is recovering and monthly sales are improving. Revenue at stores opened at least a year up moved into the positive territory for six weeks in a row, a period that includes a bulk of the back-to-school shopping season. The figure is considered a key measurement of a retailer's operating performance.

But Target, which ramped up promotions in the first quarter and pulled back in the second quarter, said it still had to cut prices more than originally expected in the latest period. That shows that even as most of its low- to middle-income shoppers have moved beyond the breach, they remain cautious about spending in a still tough economic environment.

The reduced forecast 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 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 costly 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. Target needs to reclaim its status as a purveyor of cheap chic at a time when other stores are copying its formula. To address that issue, Target is revamping its beauty departments and is also planning to increase its offerings of trendier fashions.

In an interview with reporters on Wednesday, Mulligan said the goal is to get shoppers back in stores by offering more exciting products. Customer traffic was down 1.3 percent in the first quarter, not as bad as the 2.3 percent drop in the first quarter. Right after the breach was disclosed last December, traffic dropped 5 percent.

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 more 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 new management. Last week, it outlined key initiatives such as a price-matching program and a merchandising partnership with celebrity designer Sarah Richardson. Gross profit margin rate at its Canadian business fell to 18.4 percent from 31.6 percent a year ago as it had to aggressively mark down goods.

Such factors weighed on the second-quarter results.

Target 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. Analysts expected 79 cents per share, according to FactSet.

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.

Mulligan told reporters that the company is beginning to "heal." But the reduced annual forecast takes into account a still tough economy.

"The retail environment is very promotional," he added. "Consumers still continue to act very cautiously."

Target's shares slipped 22 cents to $59.47 Wednesday.

The shares, excluding Wednesday's performance, have been down 6.3 percent since the beginning of the year and have lost nearly 13 percent of their value over the past 12 months.

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Follow Anne D'Innocenzio at http://www.Twitter.com/adinnocenzio

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