Target profit falls, cautious on holiday

NEW YORK (Reuters) - Target Corp (TGT.N) posted a surprise drop in quarterly earnings on Tuesday, hurt by weak sales of higher-profit items like clothes and home goods, and said it expects "quite modest" earnings growth for the crucial holiday fourth quarter.

Target, whose shares were down 6 percent in afternoon trading, said the soft sales environment could persist into the first half of next year, and sales of food should outpace demand for discretionary items.

The company also announced a new $10 billion share repurchase plan that replaces a previous program that had $3.4 billion remaining.

Target, the No. 2 U.S discount retailer behind Wal-Mart Stores Inc (WMT.N), said net earnings fell to $483 million, or 56 cents per share, in the third quarter ended November 3, from $506 million, or 59 cents per share, a year earlier.

Analysts, on average, had been expecting 62 cents per share, according to Reuters Estimates.

Investors are keeping a close watch on retailers' results, worried that consumers are reining in their spending heading into the holidays in the face of higher food and fuel costs, the U.S. housing market slowdown and the credit market crunch.

"Target is a great company, but I don't think they can buck every single trend that's hitting retail," said Morningstar analyst Joseph Beaulieu.

SALES STRUGGLES

Target's results come a week after Wal-Mart posted a better-than-expected 8 percent increase in third-quarter profit as it controlled expenses and cut prices to lure shoppers into its U.S. stores earlier than ever for holiday shopping.

Target's sales at stores open at least a year, a key retail gauge known as same-store sales, have been outpacing those at Wal-Mart in recent quarters, partly because Target caters to wealthier customers who are drawn to its trendy but cheap clothes, accessories and home decor.

But Target shoppers have not been immune to economic pressures. Twice during the third quarter, Target lowered its monthly same-store sales forecast after fewer shoppers came to its stores and sales were weak in higher-profit categories.

In the quarter, sales rose to $14.34 billion from $13.16 billion a year earlier, while credit card revenue rose to $493 million from $414 million.

Same-store sales increased 3.7 percent, compared with a 4.6 percent gain a year earlier.

On a call with analysts, Chairman Bob Ulrich said gross margins were hurt as sales of higher-profit merchandise like clothes and home decor were soft, while sales of lower-profit goods like food were strong.

To counter weaker sales, it will keep an eye on expenses, monitoring how many seasonal workers it hires for the holiday.

Ulrich said the current environment is more challenging than earlier this year, but there has not been "any meaningful change in the frequency, timing or level of promotional intensity within the industry compared with prior years."

Target is "cautiously optimistic" about the holiday shopping season, but fourth-quarter earnings per share should grow only modestly compared with a year earlier, the company said.

Part of that modest growth is due to a shift in the retail calendar, which included an extra week in the fourth quarter a year ago.

Target shares were down $3.40 to $50.50 in afternoon trade on the New York Stock Exchange.

CONTINUING CREDIT CARD REVIEW

In September, Target, which has been under pressure from activist investor Bill Ackman to boost its stock price, said it was considering selling $7 billion in credit-card assets.

On Tuesday it said it was evaluating "whether the benefits of a potential transaction outweigh its expected dilutive impact on earnings per share."

"At this point in the review, it is clear that if a transaction occurs, it would involve sharing a meaningful portion of our future pre-tax credit card contribution with a new partner," Doug Scovanner, Target's chief financial officer, said in a statement.

He said on a conference call with analysts that the company would have a decision on the credit card business by the end of December.

Target also said in September that it would examine future share repurchases.

Target said the new $10 billion share buyback program is expected to be completed within three years, but based on current conditions, a "significant portion" of the program is expected to be completed by the end of 2008.

The repurchases "will be partially funded by an increase in the use of debt in our capital structure," Ulrich said.

(Editing by Dave Zimmerman and John Wallace)