Target (TGT) slashes annual profit forecast. Blame Canada. (+video)

Target (TGT) slashed its annual profit outlook Thursday  to reel from a massive data breach, a disappointing expansion in Canada and sluggish sales in the US. Target (TGT) shares plunged more than 2 percent in premarket trading Thursday morning. 

By , Associated Press

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    A shopping cart outside a Target store in Riverview, Fla. Target Corp. cut its annual profit outlook Wednesday, Aug. 20, 2014, still reeling from a costly data breach and a disappointing expansion in Canada.
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Target (TGT) slashed its annual profit outlook as the retailer continues to reel from a massive data breach, a disappointing expansion in Canada and sluggish sales in the U.S.

The nation's third-largest retailer also said Wednesday that its second-quarter earnings dropped 61.7 percent.

Shares of Target fell more than 2 percent in premarket trading.

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The Minneapolis-based company said it earned $234 million, or 37 cents per share, in the quarter ended Aug. 2, compared with earnings of $611 million, or 95 cents per share, a year earlier.

Revenue rose 1.7 percent to $17.4 billion, slightly above the $17.38 billion estimate from FactSet. Revenue at stores open at least a year was unchanged from a year ago.

Excluding expenses related to the data breach, the company earned 78 cents per share, which was in line with Target's reduced estimate issued earlier in the month

Analysts expected 79 cents per share, according to FactSet.

Still, there were encouraging signs in the report. Target said that customer traffic is recovering and monthly sales are improving, with revenue at stores opened at least a year up more than 1 percent in July. That figure is considered a key measurement of a retailer's operating performance.

The results come three weeks after Target named PepsiCo executive Brian Cornell as its new CEO as the retailer fights to redefine itself to American shoppers.

Cornell, who started his job Aug. 12, marks the first outsider to take the helm at Target. He replaces Chief Financial Officer John Mulligan, who was named interim CEO when Gregg Steinhafel resigned in early May in the wake of the data breach that compromised the credit card and personal information of millions of customers and exposed big security flaws.

But Steinhafel was dealing with other challenges, including a botched expansion in Canada and criticism that Target had lost its magic as a purveyor of trendy affordable fashions and home decor.

The latest results highlight the challenges that Cornell faces. He must wrestle not only with specific problems at Target but also with broader challenges that are facing the economy and the retail industry in general.

Retailers, particularly those who cater to low-income shoppers, are still navigating a slowly recovering economy that hasn't yet benefited all Americans equally. Stores also face a shifting landscape where mobile shoppers want more flexibility in where and how they buy.

But Target's problems run deeper. For one, analysts say that Target needs to play catch-up to cater to mobile savvy shoppers by offering more services that fuse its online experience with its physical stores. It's now testing $10 rush delivery in the Minneapolis, Boston and Miami markets, offering customers the ability to order as late as 1:30 p.m. and receive a delivery of qualifying items between 6 p.m. and 9 p.m. the same day.

Moreover, Target, which created a niche for collaborating with designers for affordable merchandise, also needs to reclaim its status as a purveyor of cheap chic at a time when other stores are copying its formula. At the same time, it still hasn't been able to ditch the perception that its prices on staples are much higher than other discounters like Wal-Mart.

Target also faces the lingering effects of the breach. The company has responded to the breach by overhauling security and technology. The company has been accelerating its $100 million plan to roll out chip-based credit card technology, which is considered secure, in all of its nearly 1,800 stores.

The company said Wednesday that it incurred gross breach-related expenses of $148 million, partially offset by the recognition of a $38 million insurance receivable in the quarter.

As for Canada, the company is working to revamp its business under its new CEO of Canadian operations Mark Schindele, who replaced Tony Fisher in May. Last week, it outlined key initiatives such as a price-matching program and announced a merchandising partnership with celebrity designer Sarah Richardson.

The company said that gross profit margin in its Canadian operations fell to 18.4 percent from 31.6 percent a year earlier as the company has had to slash prices to get rid of merchandise.

The company said it now expects full-year adjusted earnings to be in the range of $3.10 to $3.30 per share, compared with prior guidance of $3.60 to $3.90. Analysts had expected $3.50 per share.

Target's shares fell $1.35 to $57.90 in premarket trading Wednesday.

The shares, excluding Wednesday's performance, have been down 6.3 percent since the beginning of the year and have lost nearly 13 percent of their value over the past 12 months.

When Target's massive data breach occurred late last year, it sent a problem that had been simmering for years to a full boil. High-profile data breaches had been occurring for years before, but Target's breach, in the thick of the holiday shopping season, made cybersecurity a topic of national concern. As the Monitor's Mark Clayton reported at the time: 

The Target cyber theft follows a number of high-profile thefts of credit card data in recent years that give cyber-security experts ideas about trends and vulnerabilities that may have permitted attacks to occur.

In 2007, retailer TJX discovered that cyber thieves had infiltrated wireless networks inside its stores, using those to access its headquarters data systems that stored card, check, and other transaction data from its stores nationwide. Data from about 45 million cards were stolen in that case.

In 2009, Heartland Payment Systems revealed that cyber thieves had hacked into its internal processing network, installing software that snatched “track data” belonging to some 130 million cards.

In recent years, federal authorities have shown some signs of progress bringing at least some cyber criminals to justice. Hacker Albert Gonzalez was sentenced in 2010 to 20 years in prison for the Heartland Payment Systems hack.

In July, the FBI charged two Russian hackers with stealing millions of dollars from more than 800,000 bank accounts. One of those hackers, and several others, were also charged with the theft and sale of about 160 million credit and debit card numbers leading to the theft or loss of hundreds of millions of dollars, according to the indictment.

Losses “included $300 million in losses for just three of the corporate victims and immeasurable losses to the identity theft victims, due to the costs associated with stolen identities and fraudulent charges,” the indictment found.

But even if federal authorities appear to be gaining some ground, it’s also true that cyber thieves’ sophistication is growing in order to surmount improved cyber defenses in the retailing industry, cyber-security experts say.

Companies like Target would likely have passed a number of cyber-security audits for its systems, they said. So the thieves would have had to circumvent multiple layers of encryption and other security measures.

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