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September 22, 2017

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Target earnings slump on Canada sales, data breach issues

NEW YORK--Target Wednesday reported a big earnings drop and lowered its forecast as the slumping chain again felt the weight of poor sales in Canada, a huge customer data breach and heavy discounting.

Target, which has 1,795 stores in the U.S. and 130 in Canada, notched second-quarter earnings of US$234 million, down nearly 62 percent from the year-ago period. Revenues rose 1.7 percent to US$17.4 billion.

The big drop in profits is the latest sign of weakness at Target, which competes in North America with the far-larger Walmart in selling low-priced clothing, groceries, housewares and other goods.

Brian Cornell, who replaced Gregg Steinhafel this month as chief executive in the wake of the data scandal, told analysts he was eager to join a company that "redefined the discount space" by marketing quality goods at low prices.

Cornell's near-term goals include overhauling Canadian operations ahead of the year-end holiday shopping season. Cornell previously worked at PepsiCo and Walmart unit Sam's Club.

The Canada arm lost US$204 million in the quarter, in part due to lower gross margins from ongoing efforts to clear excess inventory, Target said. Same-store sales in Canada tumbled 11.4 percent.

Chief financial officer John Mulligan said the Canada performance "remains unacceptable."

Analysts attribute Target's woes in Canada to an excessive number of stores and supply-chain problems that resulted in an inventory mismatch to demand. Some analysts have speculated Cornell might ultimately decide to exit the country.

Target's earnings were also dragged lower by additional costs associated with its data breach last winter, one of the biggest hacking episodes in retail history.

Target disclosed last December that hackers gained access to credit card data for 40 million customers and to additional personal and identification information for 70 million other customers.

The disclosure, made at the height of the holiday shopping season, scared off shoppers and forced the company to shell out millions in credit-card claims and identity-theft protection services to customers.

In the most recent quarter, Target spent US$148 million in gross breach-related expenses, offset in part by US$38 million in insurance recoveries. Since the data breach was disclosed, Target has spent US$236 million in all, offset by US$90 million in insurance payments.

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