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Target’s Q1 Profits Tumble

Minneapolis — Markdowns, poor performance in Canada and the fallout from last December’s data breach proved a drag on Target’s first-quarter profits.

Net earnings fell 16 percent to $418 million for the three months, ended May 3, while net sales increased 2.1 percent to $17 billion.

In the U.S., sales edged up 0.2 percent to $16.7 billion and comp sales slipped 0.3 percent. Earnings before interest expense and income taxes (EBIT) were $1 billion, a decline of 13.5 percent, and gross margin rate was 29.5 percent compared with 30.7 percent in 2013, driven primarily by additional promotional markdowns this year.

Target also incurred $18 million of net expense stemming from the data breach, in which an intruder gained unauthorized access to its network and stole certain payment card and other customer information.

In addition, the company recorded $13 million of expense in the quarter as part of a changeover of its private-label credit cards to a more secure “chip-and-PIN” card from MasterCard.

In a statement, interim president/CEO and chief financial officer John Mulligan said, “First-quarter financial performance in both our U.S. and Canadian segments was in line with expectations, reflecting the benefit of continued recovery from the data breach and early signs of improvement in our Canada operations.

“While we are pleased with this momentum, we need to move more quickly. As a result, we have made changes to our management team” — including the departure of chief executive Gregg Steinhafel — “and are investing additional resources to drive U.S. traffic and sales, improve our Canadian operations and advance our ongoing digital transformation. We … believe that they position Target for accelerated profitable growth as a leading omnichannel retailer.”

In a research note, Janney Montgomery Scott retail analyst David Strasser noted that while it was by no means a good quarter for Target, it could have been worse and “was not the disaster that was feared.”

However, “Pressure on margin is likely to continue,” he observed, “as the company attempts to regain consumer confidence, along with mix shift to online, and fights with price perception.”