Target plans to cut prices despite lower 3rd-quarter earnings

Associated Press

NEW YORK — Target Corp. said Monday it will aggressively cut prices to give consumers bargains during the holiday season, after weak sales of its apparel and home offerings led third-quarter earnings to fall 24 percent.

The discount retailer also said sales in established stores have been weak so far in November, and if that persists it expects fourth-quarter earnings below analyst expectations.

"The increasing financial challenges and economic uncertainties facing American households continued to pressure our performance during the third quarter," Chief Executive Gregg Steinhafel said during a conference call with analysts.

He also cited higher write-offs in the company’s credit-card business, where profit fell 83 percent. Target added $104 million during the quarter to a reserve fund to cover future write-offs as customers have trouble paying their bills.


The company has fared worse than its chief rival, Wal-Mart Stores Inc., as consumers cut back on discretionary spending and shop mainly for necessities, since more than 40 percent of Target’s revenue comes from nonessentials such as trendy fashions and housewares.

Last week, Wal-Mart said its third-quarter profit rose 10 percent, ahead of analyst expectations, as sales increased 7 percent.

During the holidays, Target will remain "keenly focused" on offering low prices on national brands and its own products and will match Wal-Mart prices on identical items in local markets, said Kathryn Tesija, Target’s executive vice president of merchandise.

The company will also offer half a dozen "value items" online every day at special prices.

"We have taken a very aggressive point of view this year in terms of our promotional pricing, so we expect to be price leaders on selected items in our circular," Steinhafel said. "This is not unlike what we’ve done in the past. But given the current environment and recognizing how challenging it is, we will be even sharper than we have in prior years."

The Minneapolis-based retailer said profit for the three months ended Nov. 1 fell to $369 million, or 49 cents per share, from $483 million, or 56 cents per share, last year. That was just above the average of 48 cents per share predicted by analysts polled by Thomson Reuters.

Revenue rose 2 percent to $15.11 billion from $14.84 billion last year, falling short of the $15.24 billion analysts expected. Sales were helped by new-store expansion, but that was offset by sales in established stores, which fell 3.3 percent during the quarter.

Standard & Poor’s analyst Jason Asaeda kept his "Hold" rating on the stock.


"We see Target doing a better job of communicating its value proposition to customers, but think store traffic will remain weak this holiday season and next year," he wrote in a client note.

Target said sales at stores open at least one year, a key retail metric known as same-store sales, are expected to fall 6 percent to 9 percent in November. If they keep dropping in the mid single-digit range during the quarter, the company expects earnings of 90 cents to $1 per share. Analysts had been expecting a profit of $1.22 per share, and Target shares fell $1.35, or 4.1 percent, to close at $31.68 Monday.

Profit in its credit-card business fell to $35 million from $202 million last year because of Target’s lower investment in the portfolio, a decline in its overall performance because of higher bad-debt expenses and lower interest rates.

The company sold 47 percent of its credit card receivables to JPMorgan Chase in May.

Target said it will stop most share repurchases for now and cut its 2009 expected capital expenditures by $1 billion, mainly due to a lower estimate of 2009 investments in stores that would have opened in 2010 and beyond.

"The current environment and our financial outlook have naturally reduced our appetite for investment in our business," Chief Financial Officer Doug Scovanner said in a statement.

Investor William Ackman, who heads Pershing Square Capital Management, which owns just under 10 percent of Target’s common stock, has been pushing the company to do more with its assets. Earlier this year Pershing pressured Target to make a financial move with its credit-card receivables, and the company ended up making the deal with JPMorgan Chase.

Last month, Ackman proposed a plan to spin off a real estate investment trust that would take ownership of the land Target owns under its stores and distribution centers.


Target said it is still evaluating the proposal.

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