Target's 1Q profit down 16 pct as it deals with customer data breach fallout

NEW YORK, N.Y. – Target reported a 16 per cent drop in first-quarter earnings as a massive customer data breach and a troubled expansion in Canada continue to batter the retailer.

The third-largest U.S. retailer, based in Minneapolis, also cut its annual profit outlook and issued a second-quarter projection that was below analysts’ expectations.

Still, there were some encouraging signs. Target said that it saw significant improvement in a key revenue metric from what it experienced shortly after the data breach that compromised the credit card and personal information of millions of customers and exposed big security flaws.

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. The company said its search includes candidates outside the company and the industry.

Mulligan said in a statement that Target is starting to recover from the data breach, and things are improving in Canada. “While we are pleased with this momentum, we need to move more quickly.”

Target, known for its cheap chic fashions and home accessories, used to be a darling in retailing, but now it is facing one of the most tumultuous times in its history.

Target is trying to clean house as it fixes its operations in Canada, its first foray outside the U.S., while revitalizing business in the U.S. amid heavy competition.

At the same time, Target 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 partially offset by the recognition of $8 million in expected insurance reimbursement.

The costs, however, do not 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.

All of Target’s challenges come as the broader retail industry is dealing with a slow economic recovery that hasn’t benefited all American equally and a move by shoppers away from buying in stores and toward shopping online.

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

Target says it earned $418 million, or 66 cents per share, in the quarter ended May 3. That compares with $498 million, or 77 cents per share, a year earlier.

Adjusted earnings results were 70 cents per share.

Revenue rose 2.1 per cent 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 per cent, an improvement from the 2.5 per cent drop in the fourth quarter.

In the wake of the breach, the company has been making changes, including overhauling some of its divisions that handle security and technology. The company has also been accelerating its $100 million plan to roll out chip-based credit card technology in all of its nearly 1,800 stores.

The company’s aggressive expansion into Canada, with more than 100 stores in the last year, remains a headache. Shoppers have complained that the prices are too high and the company has had inventory problems. Experts also say that Target paid too much for some of the locations. That resulted in a loss of nearly a billion dollars in the first year of operations.

For the first quarter, the Canadian segment generated sales of $393 million, below Wall Street estimates of $432 million. Gross profit margin rate was 18.7 per cent, reflecting Target’s move to clear out excess inventory.

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

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