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Data Breach Takes Its Toll on Target's Profit

Earns Target
Elise Amendola/AP
By ANNE D'INNOCENZIO

NEW YORK -- Target (TGT) cut its annual profit outlook Wednesday and said its first-quarter earnings fell 16 percent as it took another hit from a massive customer data breach and a troubled expansion in Canada.

The third-largest U.S. retailer, based in Minneapolis, also issued a second-quarter profit projection below analysts' expectations.

Target also said it doesn't expect its six straight quarters of traffic declines to reverse this year in what analysts say is the most tumultuous time in its history.

Still, there are some encouraging signs. A key revenue metric improved after tumbling shortly after the data breach, which compromised the credit card and personal information of millions of customers and exposed big security flaws.

But Target accomplished that by stepping up discounts, such as offering five 12-packs of Coke products for $10, its lowest price in more than a decade. Such heavy discounting squeezed profit margins in the quarter.

The news comes a day after the retailer fired the president of its troubled Canadian operation and two weeks after the abrupt departure of Target CEO Gregg Steinhafel.

Chief Financial Officer John Mulligan took over as acting CEO while Target searches for a new permanent leader.

In the meantime, Mulligan outlined three priorities: revitalizing Target's U.S. business by constantly testing new products; becoming a digital leader to cater to shoppers jumping back and forth from online to physical stores; and improving operations in Canada.

"We need to listen to all of them [shoppers], how they're feeling, what they want and how well we're serving them," Mulligan told investors Wednesday.

Still, whoever takes over the permanent reins of Target will have to contend with not only Target's specific issues but also broader challenges affecting the retail industry.

Stores, particularly those that cater to the low- to middle-income customers, are wrestling with a slowly recovering economy that's not benefiting all Americans equally. Retailers also face a shifting landscape where mobile shoppers want more flexibility in where and how they buy.

But Target's problems run deep.

Target, known for its cheap chic fashions and home accessories, was a darling in retailing up until the Great Recession, but was knocked off its perch. Rivals have copied its strategy of teaming up with designers for affordable collections.

At the same time, Target hasn't been able to ditch the perception that its prices on staples are much higher than other discounters like Walmart (WMT).

Target also faces uncertainty about costs related to the pre-Christmas data breach. The company said that it incurred $18 million of net expense in the first quarter of 2014, reflecting $26 million of expenses partly offset by the recognition of $8 million in expected insurance reimbursement.

Those costs, however, don't include potential claims by the payment card networks for fraud losses tied to the breach. The company said it was unable to estimate future expenses related to the data breach.

The company has responded to the breach by overhauling security and technology. The company has also 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.

As for Canada, the company needs to fix inventory shortages and other problems. On Tuesday, Target announced it replaced Tony Fisher with 15-year company veteran Mark Schindele, who was senior vice president of merchandising operations.

"We have not lived up to our potential or expectations over the last year and a half," he told reporters, referring to Canada.

As for catering to tech-savvy shoppers, Target has been slow to embrace the new landscape. But Mulligan said Target will move more quickly to test online shopping programs and get them into broad use. In fact, Target will test $10 rush delivery in June in the Minneapolis, Boston and Miami markets, offering customers the ability to order as late as 1:30 p.m. and receive a delivery of qualifying items between 6 p.m. and 9 p.m.

The first-quarter results show Target still has a lot of work to do.

Target says it earned $418 million, or 66 cents a share, in the quarter ended May 3. That compares with $498 million, or 77 cents a share, a year earlier.
  • Adjusted earnings results were 70 cents a share.
  • Revenue rose 2.1 percent to $17.1 billion.
  • Analysts had expected profit of 71 cents on revenue of $16.97 billion.
Revenue at stores open at least a year slipped 0.3 percent, better than the 2.5 percent drop in the fourth quarter. Customer traffic fell 2 percent in the quarter, offset by a 2.1 percent increase in the average transaction amount.

Target said it expects second-quarter earnings a share between 85 cents and $1, given the costs that the company faces. Analysts had expected $1.02 a share.

It also said it now expects earnings a share for the full year to be $3.60 to $3.90. That's down from previous guidance of $3.85 to $4.15 a share. Analysts had expected $3.99.

Shares rose 31 cents to $56.92 Wednesday. The stock is down 10.5 percent so far this year.


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