The bad news just keeps coming at Target Corp.

This story first appeared in the February 27, 2014 issue of WWD. Subscribe Today.

The discounter on Wednesday revealed that costs of the data breach in December and continued disappointing results from its Canadian operations hit fourth quarter and year-end results — and are likely to continue to have an impact through at least the first quarter of 2014.

Target reported that net profits for the fourth quarter ended Feb. 1 fell 46 percent to $520 million from $961 million in the previous year. Fourth-quarter sales fell 6.6 percent to $20.9 billion from $22.4 billion, reflecting a 2.5 percent decrease in comp-store sales.

Full-year net profits dropped 34.3 percent to $1.97 billion from $2.99 billion. Full-year 2013 sales declined 0.9 percent to $71.3 billion from $72 billion last year.

Net earnings per share were 81 cents in the quarter and $3.07 for the full year.


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In the first quarter, the retailer expects adjusted EPS of 60 to 75 cents, reflecting operating results in the U.S. and Canada. For full-year 2014, Target is calling for EPS of $3.85 to $4.15.

Included in the guidance is about 7 cents related to the costs of the data breach that could have impacted more than 100 million American consumers, and the retailer cautioned that these expenses could have a “material adverse effect” on its first-quarter results and beyond. The company was unable to estimate future expenses related to the breach, but indicated that it’s likely to receive a $44 million insurance payout.

“We’ve communicated often and assured guests they’d have zero liability,” said chairman, president and chief executive officer Gregg Steinhafel. “We want to reiterate that we’re committed to making things right. We know the breach has shaken the confidence of guests.”

“Regardless of the ultimate dollar amounts,” said John Mulligan, executive vice president and chief financial officer,  “we have the financial strength to move beyond these short-term impacts.”

Target is conducting a forensic investigation and accelerating the adoption of credit and debit cards with advanced chip technology, an investment of more than $100 million. Target wants to be a “clear leader in driving this change,” Steinhafel said, adding that the retailer is working with banks and other stakeholders and investing $5 million to advance education around cybersecurity and consumer scams.

Fourth-quarter sales were on track until Dec. 19, when the retailer revealed it was the victim of a data breach. “We expect guest shopping frequency to build in 2014,” Steinhafel said, adding that Target is entering 2014 with a cleaner inventory position. He said the company will continue to invest in a variety of projects.

Still, pressure has been growing on Steinhafel, exacerbated by its stumbles in expanding into Canada.
In the fourth quarter, the Canadian segment had sales of $623 million and an earnings before interest and taxes loss of $329 million. A gross margin rate of 4.4 percent reflects continued efforts to clear excess inventory. For 2013, Canada generated sales of $1.3 billion at a gross margin rate of 14.9 percent and an EBIT loss of $941 million.

Capital expenditures for 2013 were $3.5 billion, lower than expected. The figure includes $1.9 billion for the U.S. and doesn’t reflect a change in strategy, but rather, lower costs and the retiming of some projects.
This year, capital expenditures for the Canadian segment will be down $1 billion to $300 million to $400 million, reflecting the fact that the business is no longer considered a start-up.

Target is playing with the size of the City Target format, which had high-single-digit increases last year, so it can open in more places. There was no mention of new full-line Target stores. The first Target Express, the smallest store concept at 20,000 square feet, will open in July near the University of Minnesota campus.

Thanksgiving was Target’s biggest digital sales day ever, accounting for 25 percent of all transactions. A buy online, pick up in store option rolled out to all stores in the fourth quarter, accounting for 10 percent of online orders, and usage of the Target mobile app doubled from last summer to year’s end.

Target is partnering on Sports Illustrated’s bathing suit issue, launching Ambar, an apparel collection designed for the Latina customer and introducing seven premium skin care brands including Borghese, Vichy and La Roche-Posay in March. Mannequins are being tested in the apparel departments of larger U.S. stores and Target launched the Awesome Shop featuring the top products recently pinned on Pinterest that received four-star reviews or better.

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