UPDATE 2-Target shows signs of turnaround but discounting mutes outlook

Wed May 21, 2014 1:25pm EDT
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(Adds analyst quotes, details on discounting and interest expense, updates shares)

By Siddharth Cavale

May 21 (Reuters) - Target Corp reported a 16 percent drop in first-quarter profit but showed some signs of progress in its efforts to rebuild customer confidence in the wake of a massive theft of payment card data and a botched expansion into Canada.

Target, which has fired both its chief executive and the head of its Canadian operation as it tries to regain its footing, reported a 0.3 percent drop in U.S. same-store sales on Wednesday. Analysts had expected a fall of 1.1 percent.

Target shares were flat at midday, reflecting lingering concerns about the company's prospects as it resorts to discounts to win back customers and faces the daunting task of getting its business in Canada on track.

"It could have been worse is the general refrain...", said David Strasser, an analyst at Janney Capital Markets. "...It was not the disaster that was feared."

Target said traffic was "dramatically better" in the first quarter compared with late fourth-quarter trends.

Even so, U.S. store traffic fell more than 2 percent in the quarter and total sales rose just 2.1 percent to $17.05 billion, only slightly better than analysts had expected.

Brian Yarbrough, an analyst at investment firm Edward Jones, said he expected discounting - which hurt gross margins by more than a percentage point in the quarter - to continue until year-end when he expects traffic to start growing again.   Continued...