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Target Cuts Outlook for Second Quarter

First quarter results reported Wednesday were even worse than the retailer projected.

Target Store

Target Corp. warned investors in April that its first-quarter performance would be weaker than expected, but the results reported Wednesday were even worse than the retailer projected.

The Minneapolis-based mass retailer’s net earnings fell 28.5 percent to $498 million from $697 million in the year-ago quarter. For the three months ended May 4, earnings per share were $1.05, down 5 percent from $1.11 in 2012. Target said first-quarter earnings were below expectations due to soft sales in seasonal and weather-related categories.

Sales in the quarter rose 0.5 percent to $16.6 billion, from $16.5 billion in the year-ago period. Comp-store sales fell 0.6 percent in the three months compared with the 2012 period, when comps rose 5.3 percent. The last time Target’s same-store sales fell was in 2009, when the retailer posted a 1.6 percent decline in the third quarter.

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Nor is the retailer expecting things to get much better soon. Target cut its second-quarter profit forecast, now expecting adjusted EPS of $1.19 for the quarter and $4.70 to $4.90 for the full year. This compares with prior guidance of $4.85 to $5.05.

“There are cross currents of positive and negative [news]. Jobless claims are declining, but guests face the headwinds of this year’s tax increase,” said Gregg Steinhafel, the company’s chairman, president and chief executive officer.

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Steinhafel said sales were softer than expected “particularly in apparel. We remain confident in our strategy and continue to invest in” Canada, CityTarget and digital channels. The latter’s sales and traffic grew in the high teens. Mobile traffic represents more than 30 percent of Target’s digital traffic.

The company opened six stores domestically, including a CityTarget in Los Angeles. “Sales have met our expectations,” Steinhafel said. “The mix of home and apparel has been better than expected. We are focused on driving frequency in commodity categories.”

First-quarter gross margin rate increased to 30.7 percent in 2013 from 30.2 percent in 2012, reflecting category rate improvements. The first-quarter selling, general and administrative expense rate was 20.3 percent in 2013, compared with 2012 rates of 19 percent in the revised U.S. segment and 19.9 percent in the historical U.S. retail segment.

Target’s first 24 Canadian stores, which bowed in March, had sales of $86 million in the first quarter with a gross margin rate of 38.4 percent. EBIT for the first quarter was negative $205 million, as gross margin of $33 million was offset by $238 million in start-up expenses, operating expenses, depreciation and amortization related to the retailer’s entry to the market. Target opened 24 more stores two weeks ago and plans to unveil another 20 units later in the quarter on its way toward operating 124 stores in Canada. Canadian expenses will create 16 cents of dilution to EPS in the second quarter.

Kathryn Tesija, executive vice president, merchandising and supply chain, said first-quarter comps were strongest in food, house, beauty and essentials, with home and apparel down in the low-single digits.

During the quarter, Target launched a beauty box test to “understand guests’ appetite to pay for beauty samples. It generated positive feedback. We’ll continue to explore ways to surprise and delight guests with box-based offers.”

The company is testing same-day delivery in partnership with Google and eBay. It will test flexible fulfillment, where team members can order online and pick up in-store, in the Minneapolis area. Two other fulfillment pilots are due later this year.

Target is working on segmentation of assortments based on store locations and demographics. “We’re focused on providing a deeper presence of locally relevant products and brands in food, beauty, home and entertainment,” Tesija said.