Target says costs from Canadian launch affected fourth-quarter results

Revenue indicators raise concern.

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TORONTO – As Target Corp. prepares to open its Canadian discount-chic stores in the coming months, the company says the cost of its national rollout has hurt its fourth-quarter profits.

The retailer said Wednesday that net income dipped two per cent as it dealt with intense competition during the crucial holiday season, while its launch in Canada remains on track to begin in late March.

Chief executive Gregg Steinhafel told analysts on a conference call that by early April, a total of 24 stores will be open in Canada. The rest will arrive through four additional waves leading up to the holiday shopping season.

Target says it also plans to seek out further real estate to open more stores in 2014.

“After more than two years of effort, our Target Canada team is eager to welcome their first guests and begin generating sales,” said Steinhafel.

Target earned US$961 million, or $1.47 per share, for the three months ended Feb. 2, down from $981 million, or $1.45 per share, a year earlier.

Removing Canadian launch expenses of $148 million, earnings were $1.65 per share, which topped the forecast of analysts polled by FactSet for earnings of $1.47 per share.

Target had forecast adjusted earnings between $1.64 and $1.74 per share.

Revenue climbed seven per cent to $22.73 billion from $21.29 billion, meeting Wall Street’s expectations.

During the quarter, revenue at stores open at least a year edged up 0.4 per cent. This figure is a key indicator of a retailer’s health because it excludes results from stores recently opened or closed.

In Canada, Target acquired 124 properties once owned by Canadian retailer Zellers, and renovated all the stores to reflect its floor layouts and design.

“The sites we obtained in the Zellers deal were extremely well located with very attractive leases,” said chief financial officer John Mulligan, adding that they “were in very poor physical condition.”

Renovations at the new Target stores included expanding 40 locations beyond their existing floor space. Overall, the company will have an additional 600,000 square feet of space across its stores once the tweaks are completed, Mulligan said.

It also opened three distribution centres across the country.

“All in, we expect to invest about $1.5 billion of capital in the Canadian segment in 2013 as we complete renovations and expansions,” he said.

The costs will negatively affect its earnings per share by 45 cents this year, which is more than the company had initially anticipated.

“The dilution is a bit higher even than we expected perhaps a year ago and all of that is attributable to independent capital investment decisions we’ve made,” Mulligan said.

In the U.S., the company’s exclusive Neiman Marcus collaboration did not turn out to be a holiday gift to the retailer during the quarter.

The big-box retailer had high hopes for the collection of gifts made in partnership with the luxury department store, but just weeks later, Target was offering big discounts — up to 75 per cent off — to clear the shelves of unsold merchandise, which included lines of gifts from big-name designers.

Also, during the critical shopping months of November and December, Target embraced a number of different strategies, like matching the price of online competitors such as Amazon.com, Walmart.com, Bestbuy.com and Toysrus.com. It was an attempt to combat “showrooming,” in which people use smartphones while they’re in stores to look for cheaper prices online.

But the initiatives did not spur customers to buy more during the holiday shopping period, which is critical for retailers, as it can make up as much as 40 per cent of their annual revenue.

The number of transactions fell one per cent during the quarter, although the amount spent per transaction rose 1.4 per cent.

The company said its gross margin — the percentage of each dollar in revenue made that a company actually keeps — declined during the quarter due to holiday markdowns.

Edward Jones analyst Brian Yarbrough said the Neiman Marcus collection was small, so it didn’t have a huge impact on results. The bigger problem was overall seasonal merchandise that didn’t sell during a slow December.

“I think that was the biggest issue in this quarter, was leftover seasonal inventory that didn’t sell, so they cleared it out in January,” he said.

But overall, it was a decent report, Yarbrough added.

“Results were in-line, and forward guidance was pretty solid,” he said.

For the full year, the Minneapolis company earned $3 billion, or $4.52 per share, compared to $2.93 billion, or $4.28 per share in 2011. Adjusted earnings were $4.76 per share.

Annual revenue increased five per cent to $71.96 billion from $68.47 billion.

Target Corp.’s outlook for 2013 was brighter. The chain foresees first quarter adjusted earnings of $1.10 to $1.20 per share. Analysts predict earnings of $1.05 per share.

The chain’s fiscal 2013 outlook is for adjusted earnings between $4.85 and $5.05 per share. Wall Street expects earnings of $4.87 per share.

Target (NYSE:TGT) shares were down 57 cents U.S. to $63.47 in New York by the early afternoon.

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