May 21, 2014 4 min read

NEW YORK – Target cut its annual profit outlook Wednesday and said its first-quarter earnings fell 16 percent, as it took another hit from a massive customer data breach and a troubled expansion in Canada.

The third-largest U.S. retailer, based in Minneapolis, also issued a second-quarter projection that was below analysts’ expectations.

Still, there were some encouraging signs. Target said it saw significant improvement in a key revenue metric following the drop it experienced shortly after the data breach that compromised the credit card and personal information of millions of customers and exposed big security flaws.

The news came a day after the retailer fired the president of its troubled Canadian operation and two weeks after the abrupt departure of Target chief executive officer Gregg Steinhafel.

Chief financial officer John Mulligan took over as acting CEO while Target searches for a permanent leader. The company said its search includes candidates outside the company and industry.

Mulligan said in a statement Target is starting to recover from the data breach, and things are improving in Canada. “While we are pleased with this momentum, we need to move more quickly,” he added.

Target, known for its cheap chic fashions and home accessories, was a darling in retailing until the Great Recession, but it has been knocked off its perch. Now, it’s facing one of the most tumultuous times in its history.

Target is cleaning house as it fixes its operations in Canada, its first foray outside the U.S., while revitalizing business in the U.S. amid heavy competition.

Rivals have copied its strategy for teaming up with designers for affordable collections, leaving Target’s merchandise looking stale.

At the same time, Target hasn’t been able to ditch the image that its prices on staples are much higher than other discounters, such as Wal-Mart.

At the same time, Target faces uncertainty about costs related to the pre-Christmas data breach. The company said it incurred $18 million of net expense in the first quarter of 2014, reflecting $26 million of expenses partially offset by the recognition of $8 million in expected insurance reimbursement.

The costs, however, do not include potential claims by the payment card networks for fraud losses tied to the breach. The company said it was unable to estimate future expenses related to the data breach.

In the wake of the breach, the company has been making changes, including overhauling security and technology. The company also has been accelerating its $100 million plan to roll out chip-based credit card technology, which is considered more secure, in all of its nearly 1,800 stores.

Target’s challenges come as the broader retail industry is dealing with a slow economic recovery that hasn’t benefited all Americans equally and a move by shoppers away from buying in stores and toward shopping online.

Target’s middle-income shoppers have average household income of about $65,000, estimated Craig Johnson, president of consultancy Customer Growth Partners.

In a conference call with the media on Wednesday, Mulligan outlined three top priorities: revitalizing Target’s U.S. business, improving operations in Canada and making Target a leader in digital transformation.

In the U.S., Target said it is doing more testing of unique products in the stores.

“We are working very hard to accelerate newness,” he added.

As for Canada, the company announced on Tuesday that it replaced Tony Fisher with 15-year company veteran Mark Schindele, who was senior vice president of merchandising operations.

“We have not lived up to our potential or expectations over the last year and a half,” he told reporters, referring to Canada.

Mulligan also told reporters that Target needs to cater to shoppers who don’t want any barriers as they look to seamlessly jump from the web to its physical stores. In fact, the company just started allowing shoppers to order online and pick up at the stores. Rivals such as Sears and Wal-Mart have been doing it for years.

The first-quarter results show Target still has a lot of work to do.

Target said it earned $418 million, or 66 cents per share, in the quarter that ended May 3. That compares with $498 million, or 77 cents per share, a year earlier.

Adjusted earnings results were 70 cents per share.

Revenue rose 2.1 percent to $17.1 billion.

Analysts had expected profit of 71 cents on revenue of $16.97 billion.

Revenue at stores open at least a year slipped 0.3 percent, an improvement from the 2.5 percent drop in the fourth quarter. Customer traffic fell 2 percent in the quarter, offset by a 2.1 percent increase in the average transaction amount.

Target said it expects second-quarter earnings per share between 85 cents and $1, given the costs the company faces. Analysts had expected $1.02 per share.

It also said it now expects earnings per share for the full year to be $3.60 to $3.90. That’s down from previous guidance of $3.85 to $4.15 per share. Analysts had expected $3.99.