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Target CEO talks about Canada: “We need to drive trips.”

Canadian sales reach $275 million but Target execs want to see more growth in food and consumer packaged goods

Target SD-0613

After five months in Canada, Target is selling lots of blouses, but not so much bread.

That’s according to top executives with the discount retailer who yesterday said apparel sales at Target stores in Canada have exceeded expectations but that food, health care and other high-frequency categories have grown more slowly that anticipated.

“We need to drive trips,” Target chief executive and chairman Gregg Steinhafel said in a conference call with analysts after the retailer reported its second-quarter results.

READ: Metro to run Target’s Quebec pharmacies

In Canada, he said, the company is adjusting and refining operations as it learns from its experience and prepares to open another 56 stores by the end of the year.

Target’s first Canadian stores opened in early March.

Target sales in Canada reached US$275 million in the three-month period to Aug. 3.

The Canadian division’s gross margin of $87 million was offset by $207 million in startup and operating costs and $49 million in depreciation for an EBIT loss of $169 million.

Although Target’s international move has been anticipated since it agreed to move into many of the stores formerly occupied by Zellers, the Canadian launch has apparently missed the mark for many Canadian shoppers.

It began with rumblings when Target was criticized during its “soft openings” for running out of some products. Some customers also complained about pricing they considered too high.

READ: For Target, almost a bull’s-eye

A survey in August by Forum Research, a market research firm, found only 27 per cent of those polled indicated they were “very satisfied” with their experience at Target.

That was below Target’s score in Forum’s April survey, when 32 per cent of those polled indicated they were “very satisfied” with their experience at the discount retailer.

Steinhafel acknowledged there’s been a disconnect with Canadian consumers when it comes to pricing, but insisted prices were competitive and “right were they need to be when compared to competition in local markets.”

“We know there is a gap in guest awareness of how low our prices really are,” he said. “We are deploying multiple tactics to help our guests better understand the great value and convenience we provide in these categories.”

Tony Fisher, president for Target Canada, said initial traffic was good in Canada, with higher than expected sales in the home and apparel categories, but the company must now focus on driving sales in categories like health-care, food, beauty and paper, where traffic is slower.

Target is also working to adjust inventory and in-store staffing to match the pace of sales in each of its locations.

“We continue to learn a lot. There are things we’re learning about our guests about what they expect and I’d say where that’s most evident is just how that guest shops across our entire store,” Fisher said in a phone interview.

But, he added, “we don’t have to make transformational changes in our business model, it really is tweaks.”

He also said Target was committed to its Canadian expansion, noting that the company’s own internal surveys show customer satisfaction has improved every month since the launch.

“This is one of the most significant things that we’ve ever invested in as an organization,” he said.

“If we think things need to accelerate from a results standpoint, we’re actually going to over-invest in this Canada strategy as an organization because we have that much confidence that it’s the right strategy.”

Target officials also stressed that the situation in Canada isn’t all that different than what the company has experienced in the past after entering a new market in the U.S.

READ: Competition pushing drugstores to go beyond prescriptions

“In many of these markets we saw a similar pattern in which sales momentum was slower than expected at the launch but grew rapidly in the first few years after launch,” Steinhafel said.

One area Target appears to have high hopes for is its RedCard loyalty program. In the second quarter, just 2.3 per cent of sales in Canada were derived from the retailer’s RedCard debit and credit card.

By comparison, 18.7 per cent of sales in the U.S. are RedCard purchases. John Mulligan, Target’s chief financial officer, said that the retailer has typically seen a 50 per cent increase in household spending from customers after they sign up for either the RedCard debit or credit card.

Target officials yesterday said that costs associated with the Canadian expansion and cautious consumers will likely lead to weaker results for the remainder of the year, Target said Wednesday, as it reported a drop in second-quarter earnings.

“As we monitor the economy and consumer sentiment, we continue to see a mix of signals in which emerging optimism is balanced with continuing challenges,” Steinhafel said.

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Target now estimates its third quarter adjusted earnings per share will be between 80 and 90 cents US and net income will be between 55 cents and 65 cents. The adjusted EPS excludes 22 cents related to Canadian operations and three cents related to a non-operating asset in the third quarter.

The company also said its 2013 full-year adjusted earnings will be near the low end of its previous guidance of $4.70 to $4.90 per share.

Shares in the company were trading at $65.61 in the New York Stock Exchange Wednesday, down $2.34 or more than three per cent.

Target earned $611 million, or 95 cents per share, in the quarter ended Aug. 3, compared with $704 million, or $1.06 per share, a year earlier.

Excluding items, the retailer earned $1.19 per share. Target said its Canadian segment accounted for 21 cents of unusual items during the second quarter.

Total revenue reached $17.12 billion, up two per cent from $16.45 billion in the quarter. The Canadian segment generated US$275 million of the revenue.

Analysts had estimated Target’s earnings would be 96 cents per share on revenue of $17.28 billion, according to FactSet.

Revenue at Target stores open at least a year rose 1.2 per cent, below the 1.9 per cent analysts had expected.

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