Target's 4Q profit falls 46% after breach, Canada expansion

Target Corp. is pledging to win back customers in 2014 with "eye-popping, irresistible deals," even as the nation's No. 2 retailer faces a tangle of challenges after suffering a major data breach over the holidays.

The Minneapolis-based company said Wednesday that profits plunged in the final months of its fiscal year, as the retailer absorbed the twin blows of the nightmare breach and losses tied to its rocky Canadian debut.

"We've definitely got to up our game on all fronts," CEO Gregg Steinhafel said.

Target said it spent $61 million in the fourth quarter on costs related to the cyber theft, but it expects insurance to cover about $44 million of that total.

The final cost of the breach to Target may not be known for years, given litigation, but it is likely to cost the company hundreds of millions of dollars. On Wednesday, Target said it could face a wide variety of breach-related costs that could affect results this year and in "future periods." Investors nonetheless focused on the positive, pushing Target's stock up 7 percent to close at about $60.50. While results and the forecast were weak, many investors were braced for worse, said Dan Binder, managing director at Jeffries in New York.

"Bottom line, results and outlook were not good," Binder said. "But expectations were worse."

There was legitimate good news in Target's earnings, Binder said: U.S. sales continue recovering from the hit of the breach, use of Target's Redcard continues to climb and the company cut stock buybacks but didn't eliminate them altogether, as feared.

"They painted a picture that showed some slight improvement in the U.S.," said Peter Benedict, senior analyst at Robert W. Baird & Co.

Mark Miller, an analyst at William Blair & Co., said he's not as concerned about the data breach impact as he is about intense competition Target faces from online retailers such as Amazon.com and mom-friendly Zulily, as well as its problems in Canada. The company's ambitious expansion there, its first foreign push, has been tarnished by supply-chain trouble and perceptions that its prices are too high, among other things. Sales have sagged well below plans.

"Canada is way off the mark," Miller said.

The company gave no details of the types of discount promotions it has in mind to recapture shoppers, but it clearly signaled that it intends to be aggressive about winning back their loyalty.

Altogether, Target posted profits of $520 million, or 81 cents per share, for the fourth quarter that ended Feb. 1. That beat the consensus Wall Street estimate by two cents a share but was down 46 percent from the same period a year ago. Sales dropped 3.8 percent, with same-store sales down 2.5 percent, in line with the company's forecast last month.

While the data breach generated bigger headlines, the losses in Canada had a more significant effect on its bottom line. Target lost $941 million in Canada for the full year, taking 40 cents a share from profits. By comparison, the data breach reduced profits by about 2 cents a share.

Target's Canada foray has been a huge disappointment. The 124 stores, which were open on average for a little more than half the year, generated about $1.3 billion in sales. The company is adding nine more stores there this year, and said it expects sales in Canada to double in 2014.

Ken Perkins, president of Retail Metrics, called the sales-doubling projection for Canada "lofty."

Perkins said he was somewhat surprised at Target's optimistic outlook given cautious comments by other retail executives. The weather impact on retail is real, Perkins said, and when heating bills come due, consumers will have even less discretionary income.

"We think that's a big headwind going forward this year," Perkins said.