UPDATE 3-Target profit falls; sees sluggish sales growth
(Recast, adds company comments, updates stock price)
NEW YORK, May 20 (Reuters) - Target Corp (TGT.N) posted a 7.5 percent drop in quarterly profit on Tuesday, hurt by softer sales as shoppers passed over clothes and home decor purchases in favor of basics like food.
The No. 2 U.S. discount chain behind Wal-Mart Stores Inc (WMT.N) said it expects its sales growth to remain sluggish unless the economic environment improves.
"As gas and food prices continue to rise and (the) housing market slows, consumers are facing increased financial pressure and reducing their spending, especially in discretionary categories," said Gregg Steinhafel, president and chief executive officer, on a call with analysts.
Target said profit was $602 million, or 74 cents per share, for its fiscal first quarter ended May 3, down from $651 million, or 75 cents per share, a year earlier.
Analysts, on average, had been expecting earnings of 71 cents per share, according to Reuters Estimates.
"It paints to me a picture of a company that is feeling the stresses and strains of the economic environment," said Matthew Kaufler, portfolio manager of the Touchstone Value Opportunities Fund, of Target's falling profit.
Target has carved a niche for itself selling cheap but chic designer clothes and home decor, appealing to lower- and middle-income consumers looking for the latest trends.
But as the U.S. economy has faltered, so too have Target's sales, particularly of higher-margin items, as shoppers forgo purchases of new clothes and home furnishings to concentrate on necessities.
Retail sales, excluding credit card revenue, rose 5 percent to $14.3 billion, boosted by new stores openings. But sales at stores open at least a year, a key retail gauge known as same-store sales, fell 0.7 percent.
Its first-quarter gross margin rate declined from last year, driven by faster sales growth in lower-margin merchandise. the company said.
SALES STRUGGLES
Kaufler said Target has become a victim of its success now that shoppers may have to forgo buying those designer items, like Isaac Mizrahi dresses or DwellStudio sheets, for which Target has become known.
He said Target may need to make more room in its stores for the staple items that shoppers seek, or cut its prices to be more competitive.
Target said it is putting a greater emphasis in its ads and in its stores on the "Pay Less" side of its "Expect More. Pay Less." tagline to appeal to shoppers who are feeling the pinch. Continued...
