By Jessica Wohl
(Reuters) - Target Corp <TGT.N> warned of weak annual sales and profits on Wednesday as U.S. shoppers remain cautious and its new Canadian stores are not doing as well as anticipated.
Shares of Target fell as much as 4.1 percent to $65.14, their lowest level since March, and were down 3 percent in later trading.
The chain, which competes against Wal-Mart Stores Inc <WMT.N> and other discount retailers with a mix of basic goods, apparel and accessories, posted a second-quarter profit just ahead of expectations while sales missed estimates.
Target said this year's profit should come in at the low end of already reduced expectations and that sales at stores open at least a year should grow just 1 percent rather than 2 to 2.5 percent, as U.S. shoppers remain cautious in the face of ongoing household budget pressures such as higher taxes and gasoline prices.
At the same time, the Canadian business is costing more than Target anticipated and will weigh on full-year profit.
Target opened its first Canadian stores in March after announcing its plans in early 2011. That gave Target time to remodel the stores it bought from Zellers, hire and train thousands of employees and set up its supply chain, but it also gave competitors time to step up their efforts.
"The competitors have really done a good job in defending their space," said Stewart Samuel, program director at IGD Canada, pointing in particular to Wal-Mart, Loblaw Cos Ltd <L.TO> and Shoppers Drug Mart Corp <SC.TO>.
Target said it needs to do a better job of advertising low prices on basic goods such as healthcare and food items that bring shoppers in often.
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, up from a previous forecast of 45 cents.
"It's definitely gotten off to a slower start than the company expected," said Shawn Kravetz, president of Esplanade Capital LLC, which owns Target shares.
Target has 68 Canadian stores and plans for 124 by the end of the year.
WALMART U.S. DROPS LAYAWAY FEE
In the United States, which remains Target's main market by far, shoppers are visiting less often. Consumer spending on homes and cars is crowding out other spending, and income growth remains weak, said Chief Executive Gregg Steinhafel.
A handful of retailers such as TJX Cos Inc <TJX.N> along with home improvement chains have shown strength but "the rest of retail is sluggish at best," said Kravetz at Esplanade Capital. "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."
Separately, Walmart U.S. said its holiday layaway program that starts in mid-September will now be free as it gets rid of an opening fee. Layaway allows a customer to keep a product on hold at the store and pay for it over time and is also being used by chains such as Sears Holding Corp's <SHLD.O> Kmart and by Toys R Us <TOYS.UL>, but not by Target.
Cowen & Co analyst Faye Landes called Walmart's layaway 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."
Data from an Ipsos poll conducted for Reuters from August 15 to August 19 showed 13 percent of respondents said they were buying more items on layaway this year than last year.
"Our customers are feeling the pinch and they are watching every penny today," Walmart U.S. Chief Merchandising and Marketing Officer Duncan Mac Naughton said on Wednesday.
SALES MISS FORECASTS
In May, Target, noting that shoppers were sticking to shopping lists, trimmed its fiscal-year adjusted earnings per share forecast to a range of $4.70 to $4.90 from $4.85 to $5.05. It now expects a profit near the low end of that range.
Target earned $611 million, or 95 cents per share, in the fiscal second quarter ended August 3, down from $704 million, or $1.06 per share, a year earlier.
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.
Target's 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, Walmart U.S. posted a 0.3 percent decline in such sales and said they were likely to be flat this quarter.
(Reporting by Jessica Wohl in Chicago; Editing by Jeffrey Benkoe and Tim Dobbyn)