Canada drags Target's 1Q profits down; interim CEO: 'No excuses'

  • Article by: KAVITA KUMAR , Star Tribune
  • Updated: May 22, 2014 - 5:26 AM

The division lost $211 million in the first quarter; interim CEO John Mulligan called operational problems “unacceptable.”

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The Target store in Guelph, Ontario, is next to a competitor’s “Shop Canadian” sign.

Photo: Dave Chidley• Canadian Press via AP,

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John Mulligan is fully aware of those embarrassing photos floating around the Internet — the ones showing empty shelves at some of Target’s Canadian stores and visibly illustrating the company’s inventory struggles up north.

“I’ve seen those for far too long, and I would tell you I have the same reaction as the entire Canada team: it’s unacceptable,” Target Corp.’s interim chief executive said Wednesday in an interview with the Star Tribune.

The comments came as the Minneapolis-based retailer revealed continuing losses in its Canadian division. During its earnings announcement Wednesday, the retailer said it lost another $211 million in Canada for the quarter and the unit fell short of internal sales forecasts.

Mulligan said Target has no choice but to move swiftly to fix the challenged business. But more importantly, he said the company is taking a “no excuses” approach to getting things done.

Already, Target is revamping its leadership team in Canada, including ousting its division president on Tuesday. The retailer also is taking a hard look at the supply chain, and is actively searching for a nonexecutive chairman with deep experience in Canada to advise the team, Mulligan said.

He wouldn’t put a timeline on the turnaround, but said Target already has begun to see some improvement in its surveys of Canadian customers, including better perceptions of product ­availability and pricing.

Work also continues in Target’s U.S. stores, which are suffering under the weight of increased retail competition and the massive credit card breach last year. Mulligan said the company will continue to lean on promotions to help drive traffic back to the stores following the breach. But it will be more selective as to how the deals are offered.

“We’ll use promotions like pixie dust ­— spreading it around the store,” he said.

Deep promotions took a toll on margins in the first quarter. But sales in stores open at least a year dropped just 0.3 percent, which was on the high end of Target’s expectations.

On Wednesday, Target reported a 16 percent drop in its first-quarter profit, which was in line with its expectations but slightly lower than what investors expected. Net profit amounted to $418 million, or 66 cents a share, in the period ended May 3.

“It could have been worse,” David Strasser, an analyst with Janney Capital Markets, wrote in a research note. “This was by no means a good quarter, but it was not the disaster that was feared.”

Target also sharply lowered guidance for full-year results as it continues promotions, moving out clearance stock in Canada, and making investments to drive more sales and digital growth.

Brian Yarbrough, an analyst with Edward Jones, said that while investors weren’t thrilled by the lowered forecast, it makes sense. Target needs to take a hit on margins in the coming months as it tries to reverse the sales trends.

“Everything they’re talking about doing is good — it’s just going to take time,” he said. “The only thing that scares me a little bit is that once you start offering a lot of deals, it’s hard to pare back.”

Target said it incurred $26 million in expenses related to the data breach in the first quarter, about $8 million of which was expected to be covered by insurance. In the fourth quarter of last year, the retailer said it spent $61 million on costs related to the cyber theft, but expected insurance to cover about $44 million of that total.

Mulligan said the company still has work to do to get back to where it was before the breach, but he said store traffic has been rebounding.

Company executives also emphasized on Wednesday that they are focused on being faster and bringing “newness” back to Target. Mulligan said the company is working to bring in fresh products to remind customers “why they fell in love with Target in the first place.”

Among the new services the retailer is poised to test is a same-day delivery service that will be rolled out next month in Minneapolis, Boston and Miami. For a $10 rush delivery fee, customers in those markets will be able to order items online as late as 1:30 p.m. and receive them between 6 and 9 p.m. that night.

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