Canada’s lukewarm reception last year to Target’s first expansion outside the U.S. contributed to a nearly $1 billion loss for the discount retailer.
Workers install an outdoor sign at the new Target store at the Mic Mac Mall in Dartmouth, N.S., on July 20, 2013. — File photo by The Canadian Press
Target Corp. reported Wednesday that its Canadian segment had a US$329-million loss before interest and tax items in the fourth quarter ended Feb. 1.
The Minneapolis-based retailer said it generated US$623 million of sales at its Canadian stores but struggled with gross margins of 4.4 per cent of sales, reflecting its efforts to lower prices to clear excess inventory on its shelves.
Gregg Steinhafel, chairman, president and CEO of Target, told analysts that markdowns during the holiday period helped the retailer reduce average inventory rates at Canadian stores by 30 per cent in the quarter in preparation for the year ahead.
“We’re pleased that our early-cycle Canadian stores have seen the most improvement, giving us confidence that we’ll continue to see continued improvement across all our Canadian stores in 2014,” he said in a conference call.
For the full year, the Canadian segment lost US$941 million before excluded items on US$1.3 billion of sales. Target said its annual gross margin rate was 14.9 per cent.
The company said its overall profit, including tax and interest items, was reduced by 40 cents per share in the fourth quarter and $1.13 per share for the full financial year, due to its Canadian stores.
“While 2013 was a disappointing year financially, we’ve entered the new year with the right plans in place to grow profitably and generate meaningful improved financial performance in 2014 and beyond,” said Steinhafel.
Hopes had been high last year when the Target announced it was opening its first stores in Canada after buying some of the properties from the now-defunct Zellers chain.
But since its arrival in March, the retailer has faced high expansion costs and disappointing sales as shoppers complained about near-empty shelves and notably higher prices than at U.S. Target stores.
The company’s chief financial officer, John Mulligan, said he expects sales to nearly double to $2.6 billion in 2014, and approach a higher annual gross margin rate of approximately 30 per cent, at its Canadian stores.
“But clearly, we will see some near-term volatility until the Canadian business matures,” he added.
Part of the plan will involve the retailer focusing on major marketing initiatives in 2014 aimed at “frequency categories” such as groceries, cosmetics and health products.
“Over time, we expect this will lead our Canadian guests to choose Target more often in these categories, driving meaningful increases in traffic and sales,” said Mulligan, who is also the retailer’s executive vice-president.
Despite the rocky start, the retailer, the second-largest U.S. discount department store operator after Walmart, announced last month that it will be continuing with its Canadian expansion with the opening of nine more stores this year.
It plans on opening two locations in Mississauga, Ont., and one store each in Toronto, Ottawa and Barrie, Ont. Stores will also be added in Edmonton, Victoria, Winnipeg and Candiac, Que.
Five of the locations will be in former Zellers locations, while the others will be new stores.
By the end of 2014, Target said it will have 133 locations in Canada.
The company also said a massive data breach over the holidays contributed to a 46 per cent drop in its overall fourth-quarter profit, and drove down sales at all of its stores by 5.3 per cent.
“We are truly sorry for the impact this breach has had on our guests,” said Steinhafel. “We are committed to making things right.”
The breach resulted in US$17 million of net expenses in the fourth quarter, Target said, with US$61 million of total expenses partially offset by the recognition of a US$44 million insurance receivables.
It said it could not categorize how much the breach will cost the company in the future.
Target said as many as 40 million credit and debit card accounts at its U.S. stores were compromised between Nov. 27 and Dec. 15. The company disclosed the breach on Dec. 19, and about a month later, it said that hackers also stole personal information — including names, phone numbers as well as email and mailing addresses — from as many as 70 million customers.
Meanwhile, it has said an investigation also found the personal information could have included the names, addresses, emails and phone numbers of some Canadians who visited U.S. Target stores between Nov. 27 and Dec. 15.
Unlike the affected U.S. customers, who had payment data from their debit and credit cards taken, the Canadian information is limited to contact information, according to the company.
Target has said the number of Canadians affected is estimated to be less than 700,000 customers.
Since the discovery of the breach, Target has committed to providing a year’s worth of credit monitoring to its affected American and Canadian customers. It also said it will invest US$100 million into equipping its U.S. stores with Target-branded chip credit and debit cards, and contribute an additional $5 million towards a coalition with the Better Business Bureau that will help inform and educate consumers about retail fraud prevention.
For its overall operations, the company earned US$520 million, or 81 cents per share, for the quarter, compared with a profit of $961 million, or $1.47 per share a year earlier.
Revenue fell to $21.5 billion from $22.7 billion. Revenue at stores open at least a year, an important retail measurement, fell 2.5 per cent.
Analysts had expected a profit of 80 cents on revenue of 21.5 billion, according to FactSet estimates.
—By Linda Nguyen. With files from The Associated Press.