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The Globe and Mail

Target’s profitability in Canada now ‘years away’

Toronto Maple Leafs’ fans try to get a look as captain Dion Phaneuf and his wife, actress Elisha Cuthbert, make an in-store appearance at a Target in Toronto Dec. 9, 2013.

Kevin Van Paassen/The Globe and Mail

A widening data security breach has hurt Target Corp.'s crucial holiday sales, and the results have spilled over into its fledgling Canadian business, raising questions about how quickly the retailer can turn its operations around.

The second-largest discounter in the United States said on Friday it is lowering its fourth-quarter profit forecast and expects worse-than-anticipated results at its new Canadian division, which it launched last March. It projects its U.S. same-store sales at outlets open a year or more to fall 2.5 per cent compared with its previous prediction of zero gains.

Its investigation into the security breach has found that the stolen information includes names, mailing addresses, phone number or e-mail addresses for at least 70 million individuals. On Dec. 19, when it revealed the crisis, it said the security breach involving stolen credit- and debit-card data affected about 40 million customers at its U.S. stores.

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Target's setbacks come as it struggles with weak results in a challenging retail environment in which merchants are increasingly being forced to slash prices to lure customers, squeezing their bottom line. Other chains, ranging from Sears Holdings to Bed Bath & Beyond, have released disappointing holiday sales reports, setting the scene for a competitive 2014.

The security breach exacerbated its troubles at the peak of its critical holiday shopping period, putting pressure on a retailer already grappling with a disappointing Canadian roll-out and cautious consumers.

While Target had initially predicted it would be in the black in Canada by the fourth quarter of 2013, its latest results suggest "profitability for the chain there is years away," Rob Wilson, president of Tiburon Research Group in San Francisco, said.

Target said it now expects that its 124 Canadian stores will post a fourth-quarter loss of about 45 cents (U.S.) a share, almost twice its previous guidance of a loss of 22 to 32 cents a share.

Its 2013 net loss in Canada is more than $800-million, according to Perry Caicco, retail analyst at CIBC World Markets. Its 2013 sales are about $200-million below his $1.5-billion forecast, he estimated.

As a result, he predicts that Target Canada will be much more aggressive in its discounting. That could force incumbents to follow suit, prompting price wars.

Gregg Steinhafel, chief executive officer at Target, apologized to customers for their frustration after learning that their information was stolen. He said customers will have "zero liability for the cost of any fraudulent charges arising from the breach." Target also offered one year of free credit monitoring and identity theft protection to customers who shopped in its U.S. stores. It has said the breach did not affect stores in Canada.

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Target now expects that its U.S. adjusted profit per share will be $1.20 to $1.30, compared with previous guidance of $1.50 to $1.60. It said that sales had been stronger than expected before the company's Dec. 19 announcement of the card data breach but "meaningfully" weaker than expected afterward and improving in the last several days.

"The new risk to the [Target] Canadian business is that we are no longer the top corporate priority with the damage done to domestic U.S. customer confidence by the data breach," said Jim Danahy of consultancy CustomerLAB and director of the Centre for Retail Leadership at York University's Schulich School of Business.

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