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Target Corp. earnings squeezed by ambitious store expansion

by Jessica DuBois-Maahs
Feb 27, 2013


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Jessica DuBois-Maahs/MEDILL

Target Corp.'s fourth-quarter earnings show a strained consumer base and diminished foot traffic in stores such as the Target on State Street.

Retailer Target Corp.'s earnings slipped in the fourth quarter as consumers remained cautious and costs of an ambitious Canadian expansion proved higher than initially expected.

In the quarter ending Feb. 2, the chain's net income decreased 2 percent to $961 million, or $1.47 per diluted share, from $981 million, or $1.45 per diluted share, in the year-earlier period. The earnings were a penny short of meeting the $1.48 per share forecast of analysts surveyed by Yahoo Finance.

Company executives attributed the earnings decline in part to costs associated with an expansion plan that calls for opening 24 stores in Canada this April. Industry experts say that the up-front expenses were higher than the company initiallyexpected.

The stores' sales rose 6.8 percent to $22.37 billion from $20.93 billion a year earlier, helped by an extra selling week and strong holiday sales.

The sales increase was also due in part by the company's online and mobile sales initiatives that brought free wireless internet access to stores around the holiday season, according to company executives. The effort is an attempt to compete with Amazon.com, according to Mark Miller, a research analyst for William Blair & Co.

“The majority of U.S. consumers today experience prices at Amazon.com that are 13 percent below that of Target's store price,” Miller said in a research note. Amazon's shares jumped 10 percent after reporting strong fourth-quarter earnings in January. He said the Target's e-commerce push had the effect of suppressing same-store sales and foot traffic.

However the retailer's sales margins are beginning to show signs of pressure. The company's target demographic, mid-income level customers, now facies higher gas prices, a delayed federal income-tax return and an increased payroll tax, shrinking their take-home pay by about $1,000 this year.

In addition to consumer strain, expenses continue to mount for the Minneapolis-based company. The company hopes to open 124 Canadian stores before the holidays and another 15 to 20 new stores in the U.S., adding to the mounting front-loaded expenses, said CEO Gregg Steinhafel in a conference call.

“The challenges facing us in the year ahead are short-term,” Steinhafel said. “We opened more stores this year than any other year in our history, and the U.S. economy is growing at a painfully slow rate.”

Edward Jones & Co. research analyst Brian Yarbrough said many industry experts anticipated the earnings slump, but noted that the retailer's ambitious construction efforts position the company for significant long-term growth.

The chain's increase in Red Card penetration, which is the company's in-store credit and debit card, shows customer loyalty is increasing, Yarbrough said. That increase is only one way in which Target customers are showing satisfaction with the brand, an indication of a future sales improvement, he said.

The retailer's full-year net income rose a modest 2.4 percent to $2.99 billion, or $4.52 per diluted share, from $2.93 billion, or $4.28 per diluted share over fiscal 2012. The company also posted a 5.1 percent year-end sales increase, to $71.96 billion from $68.47 billion.

Target Corp. shares fell 93 cents, or 1.5 percent, to close on the New York Stock Exchange Wednesday at $63.12.