Target 3Q income down by half; stung by costs of Canada expansion

Target's stock dropped 3.46 percent today after the retailer reported third-quarter net income dropped by nearly half.

Target earned about $340 million in the quarter, down from about $640 million a year earlier. Sales at U.S. stores open at least a year rose only slightly, reflecting deep economic worries among most Americans.

The company was also stung by unexpectedly high costs related to its expansion into Canada, where the retailer has opened about 120 stores this year. Target's Canadian unit lost nearly $240 million, even before interest expense and taxes.

But CEO Gregg Steinhafel is confident the company will eventually succeed in Canada.

"While our initial sales and profits in Canada have not met our expectations, we continue to believe that our Canadian segment will contribute meaningfully to Target sales and profits over time," Steinhafel said.

The stumbles north of the border are out of character for a sophisticated merchant like Target. Stores there have had trouble keeping shelves stocked and sales have been disappointing.

"You would think it would be a slam dunk and that's what we were expecting," said John Williams, a retail consultant with J.C. Williams Group of Toronto.

"Canadians really like shopping at Target in the United States," Williams said. "They have that special love for Target and they love the flair that's in the stores. And for some reason, that's just not here. There are hundreds, literally hundreds of stock-outs. These things are crazy. What were they expecting?"

Canadians were expecting lower prices, like those they've seen in the United States. Instead, Target has based prices on the Canadian retail market, where the same products fetch more at the register.

"The retail price in Canada is much higher, compared to the retail price in the U.S.," said Minha Hwang, a management professor at McGill University in Montreal. "The Canadian price is about 20 percent higher compared to the U.S. price."

Canada also poses greater transportation, regulatory and other costs.

But there are also non-economic differences two countries' markets that American firms may miss University of Toronto marketing professor David Soberman said.

"The the assumption that many U.S. firms have is that the Canadian market is really just sort another market that much like entering another state in the U.S.," he said. "And I think that there's perhaps more difference than people expect. The way the two countries operate and the way that consumers behave."

Even packaging differences can affect sales, Soberman said.

Edward Jones retail analyst Brian Yarbrough said Target put about $1 billion into remaking the stores it bought from a Canadian retailer. He said the Canadian adventure likely will take a big bite out of Target's earnings for the year.

"Roughly $580 to $630 million or so," Yarbrough said. "The losses are worse than they originally planned."

That's more than twice what Target expected.

But retail consultant Howard Davidowitz expects Target to eventually figure out Canada.

"Canada is a rock-solid economy," Davidowitz said. "They didn't have a financial crisis. Home Depot is doing great there. Lowe's is doing great there. Walmart is doing great there. So will Target. It's an affluent, dynamic economy."

For the moment, Canada's economy is in better shape than the U.S. economy, which isn't providing Target with much of a sales or profit kick. The retailer is expecting flat sales and lower earnings state-side, as worried consumers hang on to their wallets.

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