August 5, 2014 / 2:38 PM / 5 years ago

Target warns on profit as sales stay "essentially flat"

(Reuters) - Target Corp (TGT.N) cut its second-quarter profit estimate as it resorts to price cuts to attract cash-strapped consumers and win back customers unnerved by a huge holiday-season data breach.

A view of the sign outside the Target store in Westminster, Colorado, February 26, 2014. REUTERS/Rick Wilking

The warning on Tuesday showed that new Chief Executive Brian Cornell, who takes over the third-largest U.S. retailer next week, has his work cut out for him.

“The new boss ... inherits a fine mess,” Carol Levenson, director of research at Gimme Credit, an independent corporate bond research service, said in a note.

Sales at U.S. mass merchandisers such as Target and Wal-Mart Stores Inc (WMT.N) have been hit as consumers struggling with stagnant wages and higher taxes cut back on spending.

But Target faces the additional task of rebuilding its reputation after a data breach resulted in the theft of 40 million payment card numbers and 70 million other pieces of customer data such as email addresses and phone numbers.

Target, whose shares were down 4.18 percent at $58.19 in afternoon trading, said same-store sales in the United States were “essentially flat” in the second quarter ended July.

“The core mass merchandisers are all struggling and Target is struggling with the rest of them,” Edward Jones analyst Brian Yarbrough told Reuters.

“But it is a little bit concerning that though they have pushed the lever on promotional spending it is still not driving traffic,” he said.

Target’s same-store sales have fallen in three of the past five quarters.

The company said on Tuesday it expected expenses of $110 million, net of insurance, related to the data breach in the quarter, compared with $18 million in the first quarter.

Costs increased due to a rise in actual and potential breach-related claims, including claims by payment card networks, the company said.

The company also said its sales in Canada were softer than expected in the latest quarter.

The retailer lost nearly $1 billion north of the border last year after an aggressive expansion plan stumbled.

Target said net income would also be reduced due to a payment of $1 billion to retire $725 million in long-term debt.

Excluding costs related to the data breach and debt, Target said it expected a second-quarter profit of 78 cents per share. The company had said in May that it expected earnings of 85 cents to $1.00 per share.

Analysts on average were expecting a profit of 91 cents per share, according to Thomson Reuters I/B/E/S.

Cornell, a 55-year old former PepsiCo Inc PEP.N and Wal-Mart executive who is considered a merchandise specialist, takes over on Aug. 12. He is the first outsider to run the company.

Up to Monday’s close, Target’s stock had risen about 4.6 percent since it issued its previous second-quarter forecast in May.

Reporting by Siddharth Cavale in Bangalore; Editing by Savio D'Souza and Ted Kerr

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