Target warns on annual profit, cites cautious shoppers

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Target warned on Wednesday its annual profit was likely to be near the low end of its forecast as it anticipated continued cautious consumer spending, the latest retailer to signal U.S. shoppers were holding back.

Target's second-quarter profit came in just ahead of expectations while sales missed estimates. The Canadian business is costing more than Target anticipated and will weigh on full-year profit.

Target stock was initially higher in pre-market trading following the report. (Click here for the latest quote)

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A handful of retailers such as TJX Cos. along with home improvement chains have shown strength but "the rest of retail is sluggish at best," said Shawn Kravetz, president of Esplanade Capital, which owns Target shares. "Wal-Mart and others made it crystal clear that it is a little bit tougher out there, so that shouldn't be a surprise to anyone."

Target, which competes against Wal-Mart Stores and other discount retailers with a mix of basic goods, apparel and accessories, expects U.S. shoppers to remain cautious "in the face of ongoing household budget pressures," Chairman and Chief Executive Gregg Steinhafel said in a statement.

Separately, Walmart U.S. said its holiday layaway program that starts in mid-September will be free as it gets rid of an opening fee. Target has not offered layaway so far. Layaway allows a customer to keep a product on hold at the store and pay for it over time.

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Cowen & Co. analyst Faye Landes called Walmart's announcement "a shot across the bow to its competitors, and one that clearly signals intensifying competition ahead of the all-important 2013 holiday shopping season."

'Watching every penny'

"Times are tough and it's not easy for many Americans. They are watching every penny," Duncan Mac Naughton, Walmart U.S. chief merchandising and marketing officer, said in a statement.

Data from an Ipsos poll conducted for Reuters from Aug. 15 to Aug. 19 showed 13 percent of respondents said they were buying more items on layaway this year than last year.

Sales miss forecasts

In May, Target, noting that shoppers were sticking to shopping lists, trimmed its fiscal-year adjusted earnings forecast to a range of $4.70 to $4.90 per share from $4.85 to $5.05. It now expects adjusted earnings per share to be near the low end of the May forecast.

Target earned $611 million, or 95 cents per share, in the fiscal second quarter ended Aug. 3, down from $704 million, or $1.06 per share, a year earlier.

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Including the effects from opening Canadian stores but excluding other items, Target earned 97 cents per share, one penny more than analysts expected, according to Thomson Reuters I/B/E/S.

Second-quarter sales rose 4 percent to $17.12 billion, missing the analysts' target of $17.26 billion.

Sales at Target stores open at least a year, or same-store sales, rose 1.2 percent, below analysts' estimate of a 2.1 percent increase and its own forecast of a 2 percent to 3 percent gain.

Last week, Wal-Mart said second-quarter sales at its U.S. Walmart chain declined 0.3 percent, and said sales were likely to be flat in the current quarter.

Expenses from Target's Canadian operation cut 21 cents per share from quarterly profit, 5 cents more than it forecast. It expects its Canadian expenses to reduce this year's earnings by 82 cents per share, nearly double its previous forecast of 45 cents.

The company said $275 million in quarterly revenue came from Canada.

Target opened its first Canadian stores in March, so those results were excluded from same-store sales figures. The company had said it expected Canada to add slightly to profit by the fourth quarter.

CEO Steinhafel said Target continued "to learn, adjust and refine operations" five months after opening its first Canadian stores, which may suggest initial excitement over the new stores has waned.

"It's definitely gotten off to a slower start than the company expected," Esplanade's Kravetz said of Canada.