By Paul Ziobro
Target Corp posted a surprise increase in third-quarter profit
as sales in the U.S. topped its own forecast, a sign the retailer
continues to mend from a multiyear malaise capped by last year's
data breach.
The better-than-expected results sent shares about 5% higher in
mid-morning trading, and provide a promising base for new Chief
Executive Brian Cornell to try to restore luster to the big-box
retailer.
Profit grew 3.1% in the period and sales at established U.S.
stores gained 1.2%, above the company's August projection of an
increase of as much as 1%. Target said results were strong during
the back-to-school season and in the weeks before Halloween,events
during which Target historically has thrived. And digital sales
rose 30%, contributing to half of the overall sales increase.
Target expects the momentum to continue into the holiday
shopping period, forecasting a 2% rise in same-store sales in the
U.S. in the fourth quarter, helped by initiatives such as free
shipping on all online orders and 40% off all apparel during Black
Friday.
"The fourth quarter creates new intensity as it relates to
promotional activity," Target Chief Financial Officer John Mulligan
said on a call with reporters. "We expect to be very competitive as
it relates to that."
The retailer continues to wrestle with the challenge that fewer
shoppers are visiting its stores. The number of shopper
transactions in the U.S. edged down 0.4% in the third quarter,
marking eight straight periods of declines, though it was the
narrowest drop in more than a year. And there are signs that Target
is willing to compromise profitability to bring in reluctant
shoppers. Margins slipped to 29.5% from 30% a year earlier because
of increased deals, though Mr. Mulligan noted that the amount of
promotions tempered during the quarter.
"We need to get to a place where we continue to grow traffic in
our stores," Mr. Mulligan said.
Target is trying to dig itself out of a multiyear funk, as
shoppers visited the retailer less often because of lackluster
merchandise and fewer new products--a disappointment for customers
expecting the type of cheap-chic fashions and housewares that gave
Target cachet and earned it the "Tar-zhay" nickname. Shopping
habits changed, too, as more people found they could easily make
their purchases online, eliminating the need to visit stores and
the accompanying impulse purchases.
Mr. Cornell is leading the turnaround. Hired from PepsiCo Inc.
this summer, he has pledged to focus on critical categories like
fashion, furniture, baby items and beauty products that Target
hopes can help it stand out.
His strategies had little effect on the third-quarter results,
given the long lead time in buying merchandising and setting plans.
The results show that Target's management team, who ran the
business for several months after the prior CEO, Gregg Steinhafel,
was ousted in May, laid the groundwork needed for the period's
performance.
Target also had help from the outside too. Like rival Wal-Mart
Stores Inc., Target saw a boost from lower gas prices, giving
shoppers more money to spend, Mr. Mulligan said.
It is also struggling to salvage a botched expansion into
Canada, where inventory issues have left shelves bare and prices
have been criticized as too high. Sales at established stores in
Canada rose 1.6% in the third-quarter. But Target lost another $211
million in Canada this past quarter, pushing overall losses past
the $2 billion mark since the retailer's north-of-the-border foray
began last year.
Target says that some of the problems in Canada are getting
better, adding that after the holiday season the company will have
better insight into whether it should continue there or exit.
"Coming out of the fourth quarter will inform us as far as the best
path to continue," Mr. Mulligan said.
Overall, Target reported earnings for the quarter ended Nov. 1
of $352 million, up from $341 million a year earlier. Sales rose
2.8% to $17.73 billion, topping the $17.56 billion expected by
analysts polled by Thomson Reuters.
Target tightened its earnings outlook and now expects per-share
earnings of $3.15 to $3.25 for the full year, compared with a prior
outlook for $3.10 to $3.30.
Write to Paul Ziobro at Paul.Ziobro@wsj.com
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