Canadian retreat drives Target 4Q loss; analysts see brighter signs

Updated 5 p.m. | Posted 7:31 a.m.

Target's quarterly earnings report Wednesday showed signs of a rebound in the United States as the retailer tries to move beyond a disastrous adventure in Canada.

Overall, Target posted a net loss of $2.6 billion, owing to costs related to its retreat from Canada. But earnings from U.S. operations were up by about one quarter. And total revenue reached nearly $22 billion, with sales at stores open at least a year -- a key industry benchmark, rose nearly 4 percent.

CEO Brian Cornell noted that a year ago the company was trying mend relations with tens of millions of customers whose payment card or personal information had been stolen by hackers.

Target was also trying to find its way in Canada as losses steadily mounted. Now after last month's decision to amputate the Canadian division, Cornell says the U.S. operation is on the mend.

"We made significant strides from a merchandising standpoint, from a marketing standpoint," he said. "And we continue to deliver great execution and service inside the stores."

The decision to close the Canadian business was the first major move by Cornell, who is charged with reclaiming the retailer's cheap chic image. Target is now focused on revving up its U.S. sales, especially in the fashion, home, beauty, baby and health categories

Cornell said Target will also be trying to juice up its grocery business to draw more people to its stores and website.

"We recognize we have a lot of work to do in food," he said. "We need to make changes to our assortment that deliver more organic, natural, gluten-free items critically important to the guest. We won't get there overnight. It'll be a multi-year transition," he said. "But food is going to play a very important role in making sure we drive traffic to our stores and our site."

Target made progress on another priority — online sales in the quarter rose by more than one third. But they still account for only 2.5 to 3 percent of the retailer's revenue. That includes items ordered online but picked up in stores.

Target recently announced it's cutting 550 jobs at its Minneapolis headquarters following its decision to pull out of Canada. During conference calls with reporters and analysts, there was no talk about additional layoffs. But there was discussion about making the company less complex and more efficient and agile. Those are sometimes code words for workforce reductions.

The company will discuss cost-cutting next week during a special meeting with stock analysts, said Chief Financial Officer John Mulligan.

"We're going to provide a little bit more detail next week," he said. "And as we look at costs, we look across the entire enterprise and think there are many opportunities across the company to reduce costs."

Other discount retailers, including Walmart and the parent company of TJ Maxx and Marshalls, have announced wage increases for their lowest paid workers. Target has not.

Mulligan did say Target keeps a close eye on the labor market and competitive compensation practices. But he declined to provide any specifics.

"What I'd tell you is there is nowhere we pay federal minimum wage anywhere in chain," he said. "We will continue to evaluate and react to the market and ensure that we're paying competitive wages to attract the best team."

It was a solid quarter for Target and the retailer seems to be recovering some of its old cachet, said Brain Yarbrough, a retail analyst for the investment firm Edward Jones.

"This management team said, 'Hey we need to differentiate ourselves," he said. "We need to fix the style categories, the home, the apparel, the kids and the wellness. And their initial results, we're starting to see positive reaction," he said.

"Customers reacting favorably, buying more of these items &mdash

that's how they get back to what we used to call 'Tar-zhay' of the late 90s and early 2000s," he added.

Target shares barely budged today, closing at $77.15. But the stock is up about 25 percent over the past four months, reflecting renewed confidence in the retailer.