Sales at Target Corp.'s new Canadian stores were better than expected during the first quarter, even as the department store chain reported its overall profits dropped 26 per cent.
"Whenever we open a new store in the U.S., there is a rush of traffic and sales as curious guests shop it for the first time," chief financial officer John Mulligan told investors during a conference call Wednesday.
"But the rush in Canada exceeded our expectations."
The results at Target's Canadian operations were dominated by startup expenses, but the company said they should improve overall earnings by the fourth quarter.
The Canadian stores generated $86 million in sales even though they were, on average, open for just over half of the quarter which ended May 4.
Sales were strongest in home and clothing, categories the company said that shoppers tend to hit on their first trip to a Target.
In March, Target opened its first 24 Canadian stores in southern Ontario – the company's first foray outside the U.S.
"We experienced an unexpectedly strong surge in sales as guests were eager to see their newly opened Target store," said Gregg Steinhafel, Target's chairman, president and chief executive.
Two weeks ago, the chain opened its second wave of 24 Canadian stores in Alberta, Manitoba and British Columbia.
Target plans to open 20 more stores in Canada later this quarter, five of them in the Ottawa region. If all goes according to plan, by the end of the year Target will have opened a total of 124 stores.
"This means we expect to open more Target stores in our first year in Canada than we opened in our first 10 years in the United States," said Mr. Steinhafel.
Despite the excitement in Canada, cool temperatures and financial pressures curbed customers' appetites for spending, and the company's overall operations saw first-quarter profits drop 26 per cent drop.
The Minneapolis-based company also cut its annual profit outlook, sending its stock down in afternoon trading.
Target is the latest in a string of companies including rival Wal-Mart Stores Inc. that underscore how weather and other pressures on lower- to middle-income shoppers hurt business in the first couple months of the year.
Still, Target, whose sales growth has been uneven since the recession, remains confident in its strategies to attract shoppers.
Target has reached out to customers with two big growth initiatives. It has been offering a larger selection of food and also a program, started in 2010, that gives shoppers a five per cent discount when they pay with Target-branded credit and debit cards.
At the same time, Target continues to team up with new designers for limited-time partnerships. Earlier this month, Target announced its latest designer collaboration, with Phillip Lim. The collection is due out in September.
Last year, Target expanded into urban markets using smaller versions of its big-box stores in Seattle, Los Angeles and Chicago.
"Target's first- quarter earnings were below expectations as a result of softer-than-expected sales, particularly in apparel and other seasonal and weather-sensitive categories," Mr. Steinhafel said in a statement.
"While we are disappointed in our first-quarter performance, we remain confident in our strategy, and we continue to invest in initiatives, including Canada, our digital channels, and CityTarget, that will drive Target's long-term growth."
Target said it earned $498 million, or 77 cents per share, for the three months ended May 4. That compares with $697 million, or $1.04 per share, a year earlier.
Sales rose one per cent to $16.71 billion.
Revenue at stores open at least a year slipped 0.6 per cent. That's considered an important measure of retail performance because it strips out the effect of stores that open or close during the year.
Analysts had expected earnings of 95 cents per share on revenue of $16.82 billion.
Target expects that adjusted earnings per share will be in a range between $1.09 and $1.19 for the quarter.
For the full year, the company now expects $4.70 per share to $4.90 per share. That's down from its original guidance of $4.85 per share to $5.05 per share.
Analysts had forecast $1.11 per share for the second quarter and $4.63 per share for the year.
Target's stock dropped 3.67 per cent to $68.65 in afternoon trading on the New York Stock Exchange.