With earnings down, Target takes at aim at Canada, e-commerce

The massive theft of customer data from Target has been a big headache for the retailer and the subject of lots of headlines. But recovering from the data breach is just one challenge facing the company — and perhaps not its biggest one.

Target's latest earnings report shows that its net income slid 16 percent from a year ago, to $418 million. More than $200 million in operating losses accounted for the bulk of the decline. In contrast, data breach costs represented a hit of only $18 million.

In a conference call with analysts, interim CEO John Mulligan said it's still too early to determine what the total financial toll of the breach will be on Target, once lawsuits, fraud and other claims are settled. But company surveys indicate shoppers who spurned Target because of the breach are returning.

Still, sales at U.S. stores open at least one year fell three tenths of a percent.

• More: Target reports 16 percent drop in Q1 earnings

Customer traffic at Target stores in the United States started slipping a year and a half ago, long before thieves stole the data of tens of millions of customers from Nov. 27 to Dec. 15. Many consumers are still closely watching their spending.

Mulligan also concedes that Target has lost some of its cache.

"We need to improve on something we've historically done well, delivering unique products and services at great prices," he said. "We're working quickly to drive more newness in our merchandising and presentation, helping to keep Target top of mind with guests by continually reminding them why they fell in love with Target in the first place."

Another top priority for the company is fixing the hemorrhaging at its operations in Canada, where losses now top $1 billion.

The debacle there likely played a role in the recent firing of CEO Gregg Steinhafel, as well as the head of Target's Canadian operations. Mulligan insists Canada will be fixed.

"Canada is a great market and Target is a great retailer," he said. "But so far we've not lived up to our potential or our expectations. We made changes to the Target Canada leadership team so they could take a hard look at our current performance and apply fresh thinking about how to improve."

There's a lot of room for improvement, said Antony Karabus, president of the Hilco Retail Consulting Practice in Toronto.

"They've opened 124 stores in one year, which is pretty incredible," Karabus said. "On the other hand, they're had tremendous difficulties getting their supply chain right and being in stock with the right items in the right places at the right time. There's a tremendous amount of out-of- stocks. I think the other things they have not gotten right is their pricing is not sharp enough for Canada, where people feel it's over-priced."

Target also plans to work on becoming more competitive online, investing to make its web and mobile Internet sites more compelling and better integrated with Target's store operations. Currently, Target's online channels generate only about 3 percent of sales.

Morningstar retail analyst Ken Perkins said Target needs to upgrade its e-commerce efforts to win over consumers who shop primarily or exclusively at Amazon.com or other web-only retailers.

"Convincing customers that it's worth more than just shopping at a competitor that's a pure play online competitor is going to be tough challenge," Perkins said. "But it seems that's what they're addressing."

As part of that effort, Target will soon start offering same-day home delivery of some items in Minneapolis and other markets. There'll be a $10 fee for the service.

Edward Jones retail analyst Brian Yarbrough said all the fixes and upgrades will mean lower profits for Target. But he said that's a price the company has to pay.

"You have to lower prices to drive customers in and we're seeing that, if you look at their circular on Sunday," Yarbrough said. "They need to do that to get the customer in the door in the U.S. And in Canada, they have to fix their supply chain issues and get more product on the shelves because there are still a lot of empty spots and continue to invest in e-commerce. That's kind of the wave of the future for retail."

The data breach may have led to a quarterly decline in customers using Target branded credit and debit cards to make purchases. The percentage of Target sales paid for with REDcards dropped by half a percentage point from the previous quarter to 20.4 percent. A year ago, it was 17.1 percent.

Target shares closed at $57.20 on Wednesday, up about one percent.