Target's 3Q profits up, sales recover

Downtown Minneapolis's Nicollet Mall Target
Downtown Minneapolis Target store
Bridget Bennett / MPR News

Updated 5:35 p.m. | Posted 8:06 a.m.

Target on Wednesday reported better-than-expected results for its latest quarter and offered some encouraging news about its sagging sales and money-losing Canadian operations.

Target's net earnings rose 3 percent to $352 million in the prior quarter. Sales rose at a similar rate to nearly $18 billion.

Investors were buoyed by the results as the retailer heads into the heart of the holiday shopping season. Target stock rose 7.4 percent in Wednesday trading.

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• Nov. 17: Analysts await signs of a Target turnaround

A year ago, Target's holiday sales started strong but a massive data breach revealed the week before Christmas drove customers away and whacked sales and profits hard. Now, new CEO Brian Cornell says things are looking up for Target.

"While there is much more work to be done, I'm very pleased with the momentum we're seeing with the U.S. business and the changes we've implemented to better position our Canadian segment," he said. "I'm committed to realizing the potential of this great American brand. And I believe we're taking the right first steps in that journey."

It'll likely be a long journey, analysts and investors say. But they like Target's direction and figure it's gaining some momentum.

"There's been so much bad news around Target for the last couple of years that it really didn't take a lot of good news for investors to be encouraged," said Glenn Johnson, a vice president at the investment firm Mairs and Power. "Seeing positive same store sales, it's a hopeful sign."

Investors saw a mix of good signs and bad. Losses in Canada slowed but still exceeded $200 million in the quarter. Same store sales rose about 1 percent but customer traffic fell.

Overall, though, investors saw more reasons for confidence than worry, said Ken Perkins a retail analyst with the investment research firm Morningstar.

"People are just a little bit more confident that the business is trending back in the right direction and that some of these things they've faced in the last year or so can be managed, at least in the U.S.," he said. "Competition, getting their online capability built out, all those things were positive in the quarter — that's what people wanted to see."

The results spared Cornell from having to deliver bad news for the first quarter on his watch. The former PepsiCo executive took the helm at Target in August, replacing Gregg Steinhafel.

Cornell has a real opportunity now to build up Target's momentum as he strives to reinvigorate the retailer, renew its cheap chic image and recover from the botched entry into Canada, said retail consultant Carol Spieckerman.

"I think Target is poised to go into positive territory," she said. "I think that's really going to help Brian Cornell focus on new initiatives and get support for new initiatives."

During a conference call with stock analysts, Cornell repeated his intention to focus on categories that he said Target should be known for, such as products for babies and kids, in addition to wellness and style.

He said those segments will get more money and other resources to spur growth but emphasized that other categories will not be ignored or abandoned.

He said Target's food offerings need to be "uniquely Target and clearly differentiated from our competitors." And he promised an increased focus on digital sales, especially via smart phones and other mobile devices.

Online sales have been growing rapidly but have accounted for only about 1 to 2 percent of the retailer's sales.

Target could be headed in the right direction, said retail consultant Howard Davidowitz, though he added he's withholding judgment for now.

"They have some momentum going into the most important quarter of the year," he said. "And they might be going in the right direction. All that is positive. I don't think you can go any further. I think we'll have to go through next year to see if there's a rebound."

Target officials say they expect to do less price-cutting in the current holiday shopping quarter. But they'll still be pretty aggressive with deals.

On Black Friday, the retailer will sell Target gift cards at a 10 percent discount. It's the first time Target has ever offered such a discount.

The company sees some encouraging signs for the current quarter, including lower gas prices for consumers. But many consumers are still very worried about their finances and retail competition will once again be intense. So, Target is forecasting only a modest increase in sales.