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Target profit pinched by weak U.S. sales, Canadian expansion

A Target employee returns carts to the store in Falls Church, Virginia May 14, 2012. REUTERS/Kevin Lamarque
A Target employee returns carts to the store in Falls Church, Virginia May 14, 2012. REUTERS/Kevin Lamarque

By Phil Wahba

(Reuters) - Discount chain Target Corp on Thursday blamed what it called "constrained" U.S. consumer spending for a tepid rise in quarterly comparable sales, and lowered its full-year profit forecast as a Canadian expansion proved costlier than expected.

Shares fell 3.7 percent to $64 in premarket trading.

Target competes most directly with Wal-Mart Stores Inc and other discount retailers, which have all ramped up their promotions to win over reluctant U.S. shoppers.

Last week, Walmart U.S. reported a small decline in comparable sales for its third quarter, and forecast no growth for the current quarter. It is starting holiday season sales earlier than ever to stave off rivals.

"It is challenging for retailers because things are OK out there, they're not good," said Shawn Kravetz, president of investment firm Esplanade Capital, which owns Target shares. "So retailers are getting more aggressive. Everything's a bit tighter."

An Ipsos poll for Reuters last week found more Americans were planning to spend less this holiday season than last year, and demanding big bargains.

Target's third-quarter comparable sales were up 0.9 percent, while analysts estimated a rise of 1.3 percent, according to Thomson Reuters I/B/E/S. Overall revenue rose 4 percent to $17.26 billion, below the Wall Street target of $17.36 billion.

Target, which offers a mix of basic goods and trendy apparel and accessories, pared its full-year outlook in part because its Canadian expansion this year has take longer to pay off than expected. Target opened its first Canadian stores in March after announcing the plan in early 2011.

The discounter expects its Canadian expenses to reduce this year's earnings by between 95 cents and $1.05 per share, up from 82 cents previously.

Canadian sales totaled $333 million in the quarter, but gross profit margin was 14.8 percent of sales as it cleared unsold inventory. By comparison, the U.S. gross margin was 30 percent.

Target Chief Executive Gregg Steinhafel said the company was more focused on improving its Canadian operations.

The retailer said it was looking to earn an adjusted profit per share of $4.59 to $4.69, compared with an earlier range of $4.70 to $4.90.

For the quarter ended November 2, earnings fell to $341 million, or 54 cents per share, from $637 million, or 96 cents per share, a year earlier.

"Consumer spending remains constrained" in the United States, Steinhafel said in a statement.

Other retailers reported disappointing sales on Thursday. Dollar Tree Inc said comparable sales rose a less-than-expected 3.1 percent, and Sears Holdings Corp reported that U.S. comparable stores fell 4 percent.

Abercrombie & Fitch Co , struggling with the defection of many teenage shoppers, forecast a double-digit percentage decline in comparable sales in the holiday quarter.

(Reporting by Phil Wahba in New York; Editing by Gerald E. McCormick and Jeffrey Benkoe)

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