February 24, 2009 / 1:41 PM / 11 years ago

Target profit falls 41 percent, plans focus on basics

NEW YORK (Reuters) - Target Corp (TGT.N) said quarterly profit fell nearly 41 percent, worse than Wall Street expected, and that it would focus more on food and pharmacy products instead of trendy fashions to lure shoppers.

A Target company logo is displayed on a cash register in a Target store in Falls Church, Virginia August 19, 2008. REUTERS/Kevin Lamarque

The discount retailer said on Tuesday that earnings declined as it cut prices to clear holiday merchandise and lost money in its credit card segment because shoppers fell behind on payments. It said results in the first half of the year would be below year-earlier levels.

“We are experiencing challenges not yet seen before in our business,” Chief Executive Gregg Steinhafel on a call with analysts. He said Target will take “aggressive action, balancing offense and defense, to ensure that we remain relevant to our guests.”

The company’s shares fell 0.2 percent. Rival Wal-Mart Stores Inc (WMT.N), which has gained momentum in the recession by selling lower-priced food and other necessities, rose 2.8 percent.

Target’s net income fell to $609 million, or 81 cents per share, in the fourth quarter ended January 31 from $1.03 billion, or $1.23 per share, a year earlier. Analysts had expected 83 cents per share, according to Reuters Estimates.

Sales declined 1.6 percent to $19 billion. Sales at stores open at least a year, a key gauge of a retailer’s health, dropped 5.9 percent.

SHIFT TO BASICS

The results mark Target’s sixth consecutive drop in quarterly profit and come as shoppers shift to basics after once splurging on the trendy clothes and furniture that account for roughly 40 percent of the company’s sales.

Target, which is being pressured by hedge fund manager William Ackman to turn around its business, said it would boost its dairy and frozen food selection.

In new and remodeled stores, the company is allocating more space to household, health care and beauty items, and consolidating its own private brands to make its product offerings clearer.

Target is also working to change the perception among shoppers that it charges more than Wal-Mart, putting bigger headlines in its advertising circulars to tout its low prices.

“In today’s economy, guests won’t come to us for their every day necessities if those necessities aren’t priced right,” said Kathryn Tesija, executive vice president of merchandising.

Meanwhile, as the recession deepens and job losses mount, more customers have failed to make payments on their Target credit cards, and that trend is spooking investors, said Barclays Capital analyst Robert Drbul.

“It’s largely an investment community that is risk-adverse from any exposure to accounts receivables related to credit cards,” said Drbul, who has a “buy” rating on the stock.

“You can really feel strongly about the retail operations; however, you don’t have the same level of conviction about the fundamental outlook of the credit operation.”

CREDIT LOSSES MOUNT

Target’s credit card segment reported a pretax loss of $135 million, compared with a year-earlier profit of $189 million, as it set aside $245 million in reserves to cover doubtful accounts.

CFO Douglas Scovanner said on the conference call that he did not see the need to add meaningfully to the company’s credit card reserves in the foreseeable future, and it was “highly likely” that the segment would return to moderate rates of profitability in the segment in the next two quarters.

Target has pulled back on its expansion plans, Scovanner said. It expects to open about 60 net new stores this year, down from an earlier plan of 70. Next year, it will open between five and 30 stores.

Scovanner forecast capital spending of $2 billion to $2.5 billion this year and said earnings per share in the first half of its fiscal year would be below year-earlier levels.

Analysts had been expecting profit of 53 cents per share in the first quarter and 64 cents per share in the second quarter, below the year-earlier results.

“To the extent that we are able to grow earnings in any quarter, certainly Q4 looks like the one to count on,” Scovanner said.

Reporting by Nicole Maestri, editing by Dave Zimmerman and Lisa Von Ahn

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