Updated from 9:18 a.m. EST to include executive comments from earnings call.
NEW YORK ( TheStreet) -- Target ( TGT) may be on the verge of a return to the good graces of Wall Street and consumers after the negative impact of its 2013 holiday data breach. Target's third-quarter earnings report on Wednesday went a long way to support the notion.
The Minneapolis-based big box retailer posted adjusted earnings of 54 cents a share, beating the 47 cents expected from a Bloomberg consensus estimate. Target's U.S. business stole the show, reporting a 1.2% same-store sales increase, the first sales improvement since the data breach. Analysts were expecting a 0.6% rise. Last week, larger rival Walmart (WMT) disclosed a 0.5% increase in U.S. same-store sales.
Target shares rose by 6.8% in midday trading on Wednesday.
Both Target's physical stores and digital operations contributed evenly to the increase in same-store sales, suggesting the retailer's new "ship-from-store" program, more competitive prices, and improved Web site and mobile navigation tools are working as planned. Target's newly introduced ship-from-store program at 136 stores, in 38 markets, has the ability to reach 91% of U.S. households by ground transit within one to two days. It also has a hidden benefit to Target: Lower shipping costs, said Kathee Tesija, Target's executive vice president and chief merchandising and supply chain officer, on the earnings call.
Target's new CEO Brian Cornell went further regarding the flexible fulfillment of customer orders. It "gives people a sneak peak into the Target of the future," he said.
But the biggest standout for Target in the quarter was more consumers using its RedCards, which indicates people are moving beyond the psychological, and in some cases financial, impact of the headline-making data breach. It also hints at a same-store sales recovery for Target in 2015 as, historically, Target card holders spend more and more often than non-card holders. The percentage of sales on Target's debit card rose to 11.2% from 10.4% a year earlier, while the credit card penetration increased 0.3% to 9.8%.
The reemergence of confidence in the Target brand was captured in its fourth quarter U.S. same-store sales guidance and comments about demand thus far in November. Target expects a 2% increase in U.S. same-store sales during the holiday quarter, compared to Walmart's outlook for its U.S. business that called for unchanged same-store sales to a 1% gain. Sales in "November are above our plan," said Target Executive Vice President and Chief Financial Officer John Mulligan.
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Nevertheless, Target's Canadian business remained a trouble spot that is likely to be addressed in 2015 as Target closes underperforming locations following an extensive review, which is scheduled to be shared with investors "early next year." Cornell said Target "needs a major step change in Canada, from every store." The retailer hopes to reverse its fortunes in Canada through sharper prices on apparel and food, and an improvement in how goods are brought from distribution centers to stores.
Same-store sales for Canada increased 1.6%, shy of the 2% gain expected by analysts. The division lost $211 million in the quarter, bringing its year-to-date loss to a staggering $627 million. At this time one-year ago, Target's Canadian business had generated a $612 million loss.