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Target profits fall 29% in first quarter

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Target store in West St. Paul, Minn. Target on Wednesday, May 22, 2013 reported net income of just under $500 million, down from about $700 million in the same quarter a year ago.
MPR Photo/Nikki Tundel

Lousy spring weather turned into lousy financial results for Target. Cold weather and consumer consternation over the economy helped send Target's bottom line plunging 29 percent.  

Target reported net income of just under $500 million, down from about $700 million in the same quarter a year ago. Unusual events and a variety of financial adjustments were part of the mix, but all that aside, earnings were still off 5 percent. Sales at U.S. stores open at least a year dropped around half a percent.

Most consumers have a tight grip on their wallets, Target Executive Vice president Kathryn Tesija said. That observation helped convince Target executives to lower the retailer's earnings forecast for the year.

"Our guests continue to shop cautiously, planning their spending and sticking to shopping lists, as they continue to feel the burden of economic pressures," Tesija said.

She said surveys of Target shoppers indicate three-quarters are aware of the Social Security payroll tax increase this year, and most of those shoppers have noticed the effects on their pay and spending.

Then there was the weather. The delayed spring, which Tesija said, did not inspire people to purchase shorts and bikes and other items they like when the weather turns warmer.

"This year in the face of a cold and late spring, sales were quite soft," she said. "First quarter comparable store sales in weather dependent categories like seasonal apparel, lawn, patio and sporting goods lagged the rest of our assortment."

How cold was it throughout Target's U.S. domain during the first quarter?

Piper Jaffray analyst Sean Naughton dug into that. He found the average temperature of Target's store base, weighted by state, was 5.1 degrees cooler than a year earlier.

The poor weather was a double whammy. The cold affected what customers bought, or didn't buy, when they came to Target stores. Fewer customers came through the doors. Morningstar analyst Ken Perkins noted store visits were down about 2 percent. But the number of items per sale also rose 2 percent.

"If it's poor weather you tend to travel less to the store, make less frequent trips but make the most of your trips," Perkins said. "So, you see the transactions up but the number of trips down.

Analysts were disappointed with Target's earnings. But Edward Jones retail analyst Brian Yarbrough isn't blaming management.

"It's a tough operating environment out there," Yarbrough said. "The consumer continues to look for value and the consumer is just not willing to go out and buy discretionary type items until they really need it."  

Retail consultant Howard Davidowitz said Target's performance must be kept in context. He said Target did a much better job of keeping sales up than Walmart, for instance. Walmart's same-store sales in the U.S. fell at more than twice the rate of Target. He said Target is strategically smart and its future is bright.

"Target is on the right track with Canada, City Target, their efforts online," Davidowitz said. "I think they're positioned beautifully for the future."

There are now has six city Targets, compact stores nestled in high-density urban centers. The two dozen new Canadian stores were open for about half of the first quarter, but online efforts stood out. Sales rose at a double-digit rate, and sales conducted via mobile devices grew at a triple-digit pace with mobile traffic representing about a third of total online traffic in the first quarter.

With the drop in earnings and the diminished outlook for the full year, Target's share price fell 4 percent today, closing at $68.40.