(Recast, adds company comments, updates stock price)
By Nicole Maestri
NEW YORK May 20 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
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.
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
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
Target said that while it does adjust the merchandise in
its stores, it does not anticipate making significant changes
due to the current climate.
CREDIT CARD REVENUE JUMPS
Quarterly credit card revenue rose almost 20 percent to
Target, which has been under pressure from activist
investor William Ackman to boost its stock price, said it
completed the sale of a 47 percent interest in its credit card
business to JPMorgan Chase (JPM.N) for an initial investment of
It said the deal would allow it to fund its business plans,
including its share repurchase program, without having to
access debt markets again this year.
In its latest quarter, Target repurchased 30.5 million
shares of its stock. The retailer has been buying back shares
as part of a $10 billion share repurchase plan announced in
November, and it expects to complete half or more of the stock
buyback program by the end of the year.
FOURTH QUARTER SALES REBOUND?
Chief Financial Officer Doug Scovanner expects the
retailer's sales growth to remain "sluggish" until the U.S.
economic environment improves or stabilizes. He said shopper
demand for low profit goods like groceries will continue to
pressure gross margins.
Full-year earnings of $3.47 per share are likely within a
"reasonable" range of potential outcomes for the retailer, he
said, but second-quarter earnings per share could be "somewhat
softer" than some analysts' targets of 79 cents.
Analysts, on average, expect earnings of $3.49 for the full
year and 78 cents per share for the second quarter, according
to Reuters Estimates.
CEO Steinhafel said Target's sales could "rebound" in the
fourth quarter, compared with a year ago, when its same-store
sales inched up 0.2 percent. He is "hopeful" Target can deliver
same-store sales growth in the low-single digits for the final
quarter of the year.
Steinhafel also said Target, which operated 1,613 stores at
the end of the quarter, remains committed to its new store
opening plans unless there is a protracted slowdown in consumer
Target's stock has fallen almost 6 percent in the past year
through Monday, while Wal-Mart is up 19 percent and the
Standard & Poor's Retail Index .RLX is down 21 percent.
Target shares declined 45 cents at $54.47 in afternoon New
York Stock Exchange trading.
(Reporting by Nicole Maestri, editing by John Wallace and Dave