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Target’s Q3 Net Profits Decline

Comp-store sales increased 0.9 percent in the quarter, which is near the low end of the retailer’s prior guidance.

A Target store.

Target’s net profits for the third quarter ended Nov. 2 declined 46 percent to $341 million from $637 million in last year’s quarter, falling below the company’s expectations. Earnings per share of 54 cents fell 46 percent from 97 cents in the third quarter of 2012, a result of the higher-than-expected dilution of 29 cents related to the Canadian segment.

Comp-store sales increased 0.9 percent in the quarter, which is near the low end of the retailer’s prior guidance.

Sales in the third quarter rose 4 percent to $17.26 billion, from $16.6 billion in the prior year’s third quarter. But Target cut its outlook for the year to EPS of $4.59 to $4.69 from its earlier projection of EPS of $4.70 to $4.90, pointing again to costs associated with the Canadian operations.

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“Profits and sales in Canada have not met our expectations, but we remain confident in their potential,” said Gregg Steinhafel, chairman, president and chief executive officer of Target. “Our Canadian segment will contribute meaningfully to Target sales over time. The shortfall will moderate next year, leading to significant improvement in Canadian profit.”

Segment earnings before interest expenses and income taxes were $977 million, a decline of 11.4 percent from $1.1 billion in 2012. Earnings before interest, taxes, depreciation and amortization were 8.7 percent in the third quarter. The gross margin rate decreased to 30 percent from 30.3 percent last year.

“The gross domestic product continues to grow at a painfully slow pace while household income remains constrained,” said Steinhafel. “Household incomes have seen additional pressure from this year’s payroll tax increase. The recovery took a dramatic step backward during the government shutdown. The competition has become increasingly focused on promotions to gain the attention of value-conscious consumers and clear discretionary categories.”

Target borrowed a phrase from Wal-Mart: everyday low prices. “Low everyday prices and our price-matching policies offer unbeatable value in the marketplace,” said Steinhafel.

Home and apparel saw small declines in comp sales, while apparel, hardlines and beauty experienced strong growth online in the third quarter. “We’re pleased with [3.1] Phillip Lim for Target,” said Kathryn Tesija, executive vice president, merchandising and supply chain. “It’s our best designer launch ever, both in stores and online, with very clean sell-throughs. The launch of holiday is off to a good start. We’re very pleased with apparel overall. The softest part of apparel has been in kids.”

Target will open at 8 p.m. on Thanksgiving, an hour earlier than last year.

The retailer returned $271 million to shareholders in the third quarter, but didn’t repurchase any shares. “We will resume repurchasing shares when conditions are appropriate,” said John Mulligan, executive vice president and chief financial officer. The company expects fourth-quarter EPS of around $1.26 and is planning flat comp store sales in the U.S., given the six fewer shopping days between Thanksgiving and Christmas, the state of mind of the consumer and the competitive environment.