UPDATE 4-Target profit falls, suspends buybacks; shares down

Mon Nov 17, 2008 1:38pm EST

Related Topics

* Q3 shr $0.49 vs $0.48 analysts' view

* Suspends share buybacks, cuts 2009 capex by $1 bln

* Q3 same-store sales fall 3.3 pct

* Shares down 3 percent (Adds comments from conference call, updates stock price)

By Nicole Maestri

NEW YORK, Nov 17 (Reuters) - Target Corp (TGT.N) posted a nearly 24 percent drop in profit as an economic downturn curtails shoppers' ability to splurge on the discount retailer's trendy wares and make payments on its credit cards.

To navigate the tough environment, Target will conserve cash to protect its liquidity and debt ratings, the company said on Monday.

It is temporarily suspending nearly all of its share buybacks, has cut its 2009 capital spending plan by $1 billion, and is pulling back new store openings at least through 2010. Shares in the company fell 3 percent to $32.03.

"The consumer is more than hesitant," Chief Executive Gregg Steinhafel said on a conference call. "They are very stressed right now and we, like other retailers, are all struggling from the inability ... to motivate and inspire people to come into our stores."

The results on Monday marked Target's fifth consecutive drop in quarterly profit, and Target forecast earnings for the current quarter that could fall below Wall Street targets as it cuts prices to clear through poor selling merchandise.

But the latest quarter's profit was slightly better than expected, and analysts said its forecast for the holiday season was expected as shoppers confront tighter budgets and decreased access to credit.

"Most people have been anticipating that retailers are going to be taking down their numbers for the fourth quarter," said Stephanie Hoff, an analyst with Edward Jones "I don't think it's that shocking."

Profit fell to $369 million, or 49 cents per share, in the third quarter ended Nov 1, from $483 million, or 56 cents per share, a year ago. Analysts, on average, expected earnings of 48 cents per share, according to Reuters Estimates.

Sales rose 1.7 percent to $14.6 billion as it opened more stores. But sales at stores open at least a year, a key gauge of a retailer's health known as same-store sales, fell 3.3 percent.

CONSUMERS AVOID CLOTHES, HOME DECOR

While Target made a name for itself selling cheap but trendy designer clothes and home decor, its business has faltered in the last year as shoppers shift spending in favor of basics, like food and toiletries.

That trend has hurt Target, where discretionary merchandise like clothes and furniture account for roughly 40 percent of sales, and helped larger rival Wal-Mart Stores Inc. (WMT.N)

Its profits are also taking a hit as more customers fall behind on their Target credit card payments.

Target said profitability in its credit card segment fell 83 percent to $35 million in the quarter.

Part of the decline was due to the retailer's reduced investment in the portfolio. Earlier this year, Target sold a 47 percent interest in the business to JPMorgan Chase & Co (JPM.N). But the decline was also caused by an increase in shoppers becoming delinquent in payment of their credit cards.

Chief Financial Officer Doug Scovanner said he expects write-off rates in its credit card business will increase modestly over the next few quarters.

Scovanner said Target had temporarily suspended "substantially all" of its share repurchase activity, and cut its 2009 capital spending plans to $3 billion from $4 billion. That will mean fewer new store openings in 2009 and 2010.

Last month, Target said it had canceled certain new store projects for 2009 that no longer made financial sense. It said it would open about 70 net new stores in 2009, down from an earlier projection of 70 to 75 net new stores.

NOVEMBER OFF TO SLOW START

Scovanner said that in November, sales started off much lower than expected. If Target's same-store sales for the fourth quarter fall in the mid-single-digit range, it could report earnings of 90 cents to $1 per share, he said.

Analysts, on average, are expecting $1.17 per share.

To win holiday sales, Target said it will meet Wal-Mart's prices on identical items, and communicate to shoppers that its fashionable goods do not necessarily mean higher prices.

Last week, Wal-Mart posted a nearly 10 percent rise in quarterly profit as shoppers sought its low prices on food and toiletries [ID:nN13360393]. Analysts say shoppers perceive Target's prices to be higher than those at Wal-Mart.

With its stock price down roughly 38 percent in the past year, Target is facing pressure from investor William Ackman, who has proposed the retailer spin off a separate company that would own the land on which its stores are built.

Target said no decision had yet been made on Ackman's proposal. (Reporting by Nicole Maestri; Editing by Derek Caney and Gunna Dickson)

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