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Target's Canadian stores loses nearly US$1 billion since opening last March

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A lukewarm reception to Target's first expansion outside the United States contributed to a nearly $1-billion loss for the Canadian operations of the discount retailer last year.

In the fourth quarter alone, Target Corp. said its Canadian segment suffered a US$329-million loss before interest and taxes. The retailer generated US$623 million of sales in Canada but said it struggled with gross margins of 4.4 per cent, reflecting efforts to lower prices to clear excess inventory.

Overall, the Minneapolis-based retailer said Wednesday that it earned US$520 million, or 81 cents per share in the quarter, down from $961 million, or $1.47 per share a year earlier.

Revenue fell to US$21.5 billion from $22.7 billion as revenue at stores open at least a year, an important retail measurement, fell 2.5 per cent. Analysts had expected a profit of 80 cents on revenue of $21.5 billion, according to FactSet estimates.

It said the costs associated with moving to Canada reduced the company's quarter's net income by 40 cents per share and full-year net income by US$1.13 per share.

Gregg Steinhafel, chairman, president and CEO of Target, told analysts that markdowns during the holiday period helped the retailer reduce average inventory rates at Canadian stores by 30 per cent in the quarter.

"While 2013 was a disappointing year financially, we've entered the new year with the right plans in place to grow profitably and generate meaningful improved financial performance in 2014 and beyond," he said in a conference call.

For the full year, the Canadian segment lost US$941 million before excluded items on US$1.3 billion of sales, with its annual gross margin at 14.9 per cent.

Hopes had been high when Target opened its first stores in Canada last year after buying some of the properties from the now-defunct Canadian discounter Zellers.

But since its entry last March, the retailer has faced high expansion costs and disappointing sales as shoppers complained about near-empty shelves and notably higher prices than at U.S. Target stores.

Retail consultant Maureen Atkinson said competition for consumers' dollars is fierce in Canada, as other retailers like Walmart and Shoppers Drug Mart ramped up their expansion plans in preparation for Target's arrival.

"There have been fundamental issues here (with Target)," said Atkinson, who is with the Toronto-based firm J.C. Williams Group. "They have to do better."

Atkinson said a more intense marketing campaign in Canada could work if Target is successful at portraying itself as a go-to value destination for "frequency categories" such as groceries, cosmetics and health products.

"Canadians aren't used to coming frequently to a store like Target because they treat it more like a department store, whereas Target wants to be seen as a grocery store or drug store," she said.

"Obviously it would help if people came to the store more times because there will be more opportunities for them to buy things."

The company's chief financial officer, John Mulligan, attributed the disappointing earnings to growing pains the company experienced with its rapid Canadian expansion.

Looking ahead, he expects Canadian sales to nearly double to $2.6 billion in 2014, with stores approaching a higher annual gross margin rate of approximately 30 per cent.

"But clearly, we will see some near-term volatility until the Canadian business matures," said Mulligan, who is also the retailer's executive vice-president.

Despite the rocky start, the retailer, the second-largest U.S. discount department store operator after Walmart, announced last month that it will open nine more stores in Canada this year. Two locations will be in Mississauga, Ont., with one store each in Toronto, Ottawa and Barrie, Ont. Stores will also be added in Edmonton, Victoria, Winnipeg and Candiac, Que.

By the end of 2014, Target said it would have 133 locations in Canada.

Meanwhile, the company also said a massive data breach over the holidays contributed to a 46 per cent drop in its overall fourth-quarter profit, and drove down sales at all of its stores by 5.3 per cent.

The breach resulted in US$17 million of net expenses in the fourth quarter, Target said, with US$61 million of total expenses partially offset by the recognition of a US$44 million insurance receivables.

It said it could not categorize how much the breach will cost the company in the future.

Target said as many as 40 million credit and debit card accounts at its U.S. stores were compromised between Nov. 27 and Dec. 15. It later revealed that hackers also stole personal information — including names, phone numbers as well as email and mailing addresses — from as many as 70 million customers.

Canadians who visited U.S. Target stores during this period could've also been victimized, but unlike the affected U.S. customers, who had payment data from their debit and credit cards taken, the Canadian information was limited to contact information, according to the company.

The number of Canadians affected is estimated to less than 700,000 customers.

Since the discovery of the breach, Target has committed to providing a year's worth of credit monitoring in Canada and the U.S.

It also said it will invest US$100 million into equipping its U.S. stores with Target branded chip credit and debit cards, and put $5 million towards a coalition with the Better Business Bureau that will help educate consumers about retail fraud prevention.

— With files from The Associated Press

Note to readers: This is a corrected version. An earlier story said the Canadian segment of Target lost US$941 billion instead of million.

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