Target Profit Falls as Retailer Continues to Pay for Data Breach

(Minneapolis Star Tribune/MCT) -

Target Corp.’s second-quarter results met lowered expectations, as U.S. sales were flat and it absorbed more costs related to last year’s data breach.

The company’s adjusted earnings, which excludes one-time costs and gains, fell about 20 percent, while sales grew 2 percent in the three months ending Aug. 2.

Executives said there were signs of improvement in July and the start of this month, which will show up in the next quarter’s results. Even so, they lowered the profit outlook for the remaining six months of the fiscal year. Target now expects full-year adjusted profit of $3.10 to $3.30 a share, compared with its prior outlook of $3.60 to $3.90 a share.

Target shares closed Wednesday up $1.08, or 1.8 percent, to $60.33.

“While results from the quarter didn’t meet our expectations, we are seeing some early signs of progress as we work to improve results in the U.S. and Canada,” John Mulligan, Target’s chief financial officer and interim CEO through the quarter, said in a statement.

Target said its U.S. comparable-store sales were flat in the second quarter. It reported drops in same-store sales in three of the previous five quarters. Mulligan said that there were “better” results in August with back-to-school sales.

Analysts did not expect any big surprises Wednesday morning, since Target disclosed earlier this month that sales were coming in lower than hoped. On August 5, the Minneapolis-based retailer lowered its profit outlook for the second quarter, noting that sales were softer than expected at its Canadian stores and that deep promotions in both the U.S. and Canada had cut into its margins. Target has been stepping up its discounts in order to draw customers back since last year’s massive data breach that initially scared off many customers.

But those deals also cut into margins in the first quarter, when Target reported a 16 percent drop in profit.

With its revised outlook, Target expected adjusted earnings per share in the second quarter of 78 cents, below its prior outlook of 85 cents to $1 per share. Wednesday’s results hit the 78-cent mark, though analysts had settled on a forecast of 79 cents per share. A year ago, Target’s adjusted per-share profit was 98 cents.

Overall revenue was $17.4 billion in the latest quarter, up from $17.1 billion a year ago.

In order to help drive more traffic to its stores, Target this month began extending the hours of about half of its stores so they stay open an hour or two later, until midnight in some cases.

In a conference call with reporters, Mulligan said store traffic remained lower in the latest quarter, but momentum was shifting. Traffic fell 5 percent in the fourth quarter of last year – the quarter that includes the year-end shopping season – during which the data breach occurred. It was down 2.3 percent in the first quarter of this year and down 1.3 percent in the latest period.

“We’re continuing to heal the business,” he said.

Now, he said, Target is feeling the challenge of the overall retail environment, in which many firms are offering promotions and discounts. Target has been using promotions to drive back traffic to its stores since the data breach. Mulligan said it was more selective with discounts in the second quarter but still used more than planned because of the competitive landscape.

The retailer said on Aug. 5 that it expected to rack up $148 million in costs related to the data breach in the second quarter, an amount that should cover most of the remaining breach-related claims. That brings Target’s total expenses from the breach thus far to $235 million, about $90 million of which is expected to be picked up by insurance. Analysts have noted that that total is far below the $1 billion in costs some initially feared the breach would cost the retailer.

Target recently unveiled a turnaround plan to fix its struggling Canadian operations, which lost nearly $1 billion last year. The plan includes initiatives to address its stocking issues, lower some prices and tweak its merchandising assortment up north.

Also last week, Brian Cornell, a former PepsiCo and Sam’s Club executive, took over as Target’s new CEO.