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VOL. 129 | NO. 163 | Thursday, August 21, 2014

Target Cuts Outlook as Breach Fallout Lingers

ANNE D'INNOCENZIO | AP Retail Writer

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NEW YORK (AP) Target Corp. slashed its annual profit outlook for the second time in three months as the retailer reels from a massive customer-data breach, a botched Canadian expansion and sluggish U.S. sales.

The nation's third-largest retailer also said Wednesday that its second-quarter earnings dropped 61.7 percent. Excluding expenses related to the data breach, earnings per share came in a penny short of Target's reduced estimate, issued earlier this month.

The latest results highlight the challenges that new CEO Brian Cornell, a former PepsiCo executive who officially started at Target Aug. 12, faces on all fronts.

Cornell must wrestle not only with problems specific to Target, such as restoring the discounter's reputation as a cheap chic fashion purveyor. But he also must address broader challenges from the economy and competition in the retail industry.

Target says most of its low- to middle-income shoppers have moved beyond the data breach, but they remain cautious about spending in a tough environment. Target said it had to cut prices more than originally expected in the latest period to get shoppers to buy.

That environment has also tripped up rival Wal-Mart Stores Inc., which lowered its annual profit forecast last week amid sluggish sales.

Target and other retailers also face a rapidly changing business where shoppers, looking for convenience, are moving away from physical stores and researching and buying on their PCs and mobile devices. That has contributed to traffic declines at Target and other retailers.

In his first earnings conference call as Target's new leader, Cornell told investors his top priorities are turning around the U.S. and Canadian businesses, as well as pushing Target to innovate more quickly in digital shopping.

He said he had just returned from a trip to Canada and that he plans to spend time listening to employees. But he also emphasized there's no time to waste.

"I want to be a good student of the business," he said. "But clearly, we have a sense of urgency here and a sense of pace."

Cornell is the first outsider to take the helm at Target. He replaced John Mulligan, the chief financial officer who was interim CEO after Gregg Steinhafel resigned in early May in the wake of the breach that compromised the credit card and personal information of millions of customers and exposed big security flaws.

Mulligan said during a call that Target plans to return to a more normal pace of discounting and focus on attracting shoppers by stocking more exciting products.

To that end, Target is revamping its beauty and baby departments and is also planning to increase its offerings of trendier fashions.

There were some encouraging signs. Customer traffic was down 1.3 percent in the first quarter, not as bad as the 2.3 percent drop in the first quarter. Right after the breach was disclosed last December, traffic dropped 5 percent.

Revenue at stores open at least a year up moved into the positive territory for six weeks in a row, a period that includes a bulk of the back-to-school shopping season. The figure is considered a key measurement of a retailer's operating performance.

Expenses related to the data breach totaled $148 million in the quarter, partially offset by the recognition of a $38 million insurance receivable.

As for Canada, the company is overhauling its business under new management. Target said nearly half of the 70,000 items stocked in a typical Canadian store will be new by the holiday season.

Target 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. Analysts expected 79 cents per share, according to FactSet.

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.

Follow Anne D'Innocenzio at www.twitter.com/adinnocenzio

Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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