Canada troubles hurt Target on eve of price-war season

As Target Corp. braces for what is expected to be a tepid holiday shopping season, the cheap-chic discounter continues to face challenges in its newest market — Canada.

If the Minneapolis-based retailer's third-­quarter results are any sign, it will be a tough holiday season indeed.

Target's bottom line was $341 million, or 54 cents a share, for the quarter ended Nov. 2, down 47 percent from $637 million, or 97 cents a share, in the same period a year ago. Canadian operations reduced Target's earnings per share by 29 cents.

Overall sales rose 4 percent to $17.3 billion in the quarter.

Of that amount, $333 million in revenue hailed from Canada, but Target spent $221 million on start-up and operating expenses, causing a loss of $238 million before interest and taxes. Gross margins from Canadian operations were un­usually low at 14.8 percent, driven by efforts to clear excess inventory.

"They had high expectations when they moved to Canada, and they're nowhere close to hitting those targets," said Brian Yarbrough, an analyst at Edward Jones & Co.

In March, Target opened its initial round of stores in Canada — the first bull's-eye locations outside the United States — to great fanfare. Many Canadian shoppers already were familiar with Target, but the rollout was marred with reports of empty shelves and the perception that prices were higher north of the border. Target Canada President Tony Fisher told analysts last month that Canadians still haven't fully embraced the one-stop shopping model prevalent in the United States.

"A lot of people were concerned about that gross margin figure," said Amy Koo, senior analyst at Kantar Research. "There was a significant imbalance between what they thought they needed to have available and what they could sell through. They're trying to catch up on inventory, but unfortunately there's a long lead in terms of ordering. They are working through that."

Target CEO Gregg Steinhafel told analysts on Thursday's conference call, "While our initial sales and profits in Canada have not met our expectations, we remain enthusiastic about the Canadian market and confident in the long-term success of those stores." He said sales shortfalls and earnings dilution from excess inventory and start-up costs will moderate next year, leading to significant improvement in the Canadian segment's profitability.

Still, with 124 Canadian stores expected to be open by the end of the year — out of a total of 1,919 Target stores — the impact of the conundrum is somewhat mitigated.

The overall holiday season is shaping up to be all about shoppers seeking out the best deals, and from Target's standpoint, that means aggressively offering deals and doorbusters to lure those dollars. "Consumers will be laser-focused on value," Steinhafel observed, noting that there are six fewer holiday shopping days this year.

Key product categories are expected to be toys and electronics, including platform launches from Sony PlayStation and Xbox "bringing newness to the category which hasn't seen meaningful change in many years," said Kathyrn Tesija, Target's executive vice president of merchandising.

Early results indicate that customers are using the new in-store pickup feature to reserve high-ticket items such as iPads and items from the weekly ads that tend to sell out quickly, she said. Target's toy catalog this year features more than 500 items and over $100 worth of coupon savings.

Despite executives' measured optimism, the company said it expects to earn about $1.26 a share in the fourth quarter, compared with earlier estimates of about $1.43. It also lowered full-year profit expectations to around $3.52 per share, down from $3.85 per share previously.

Target shares closed Thursday at $64.19, down $2.30 or 3.5 percent.

Bloomberg News contributed to this report. Janet Moore • 612-673-7752