After two months, Target's Canadian sales are $86 million

Gross margin rate for the company’s Canadian business was 38.4% in first quarter

Sales at Target Corp.'s new Canadian stores were better than expected in the first quarter, officials with the discount retailer said yesterday, even as overall profits dropped 26%.

"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.''

Target's Canadian stores raked in US$86 million in sales in their first two months of business. Gross margin for the company’s Canadian business was $33 million, offset by $238 million in start-up costs.

Sales were strongest in home and clothing, categories the company said that shoppers tend to hit on their first trip to a Target.

READ: For Target, almost a bull's-eye

Overall, the retailer reported net earnings of $498 million for the three months ended May 4, 2013, down 28.5% from the same period last year.

President and CEO Gregg Steinhafel described Target’s overall earnings as “below expectations” in a release.

He attributed the company’s lackluster performance to “softer-than-expected sales, particularly in apparel and other seasonal and weather-sensitive categories.”

“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,” Steinhafel added.

In the U.S., sales crept up 0.5% in the first quarter to $16.6 billion. There, food and pet supplies accounted for approximately 19% of total sales in 2011.

It's difficult to estimate how much of Target's sales in Canada are grocery items at the moment. Target's Canadian stores devote about 10,000 square feet to food, but unlike in the U.S., the Canadian stores do not yet offer fresh food such as produce and meat.

In a report published this week in the newsletter Grocery Trade Review, CIBC analyst Perry Caicco wrote that he expected Target's Canadian food sales in 2013 would total only about $370 million "since its stores are opening gradually over the course of the year."

According to a release, 2% of Target sales in Canada were paid for using the company's RedCard (the retailer's loyalty program) in the first quarter. That compares to 17.1% in the U.S.

Target's first three Canadian stores opened in Ontario on March 5. Another 17 stores were opened in that province March 19, followed by four more March 28.

Another 24 stores were opened in May in B.C., Alberta and Manitoba. However, it's worth noting that these openings came after the company's most recent quarter ended so aren't factored into the $86 million in first-quarter sales.

This ad will auto-close in 10 seconds