NEW YORK – Target Corp. posted a 7.6 percent drop in second-quarter profit Tuesday and offered a cautious outlook for the third quarter as its customers focused on necessities like milk and paper towels and had trouble making their monthly credit card payments.
The Minneapolis-based retailer also said it had seen an erratic start to the back-to-school season and that it would open new stores at a slower pace in fiscal 2009 amid the uncertain economy.
Target said it earned $634 million, or 82 cents per share, for the three-month period ended Aug. 2, down from $686 million, or 81 cents per share, a year earlier.
Sales grew 5.7 percent to $15 billion from $14.2 billion. Same-store sales, or sales at stores opened at least a year, slipped 0.4 percent. Same-store sales are considered a key indicator of a retailer's health.
Analysts surveyed by Thomson Reuters had expected a profit of 76 cents per share on revenue of $15.46 billion.
Target shares slipped more than 1 percent, or 64 cents, to $49.41 in midday trading.
The company had for several years outperformed its rival Wal-Mart Stores Inc., the world's largest retailer, but has stumbled in recent months largely due to its heavier emphasis on items like clothing and home furnishings, which accounts for 40 percent of its business.
“The customer is very cash-strapped right now and in some ways, our greatest strength (has) become somewhat of a challenge,” Target's President and Chief Executive Gregg Steinhafel told investors during a conference call. “During these tough times, some of our consumers don't want to be tempted as much as they have in the past.”
Target said that gross profit margin rates fell moderately from last year, because sales grew faster in low-margin categories – which generally include food and essentials like paper goods.
In its credit card operation, Target said it earned $74 million, down 65 percent from $213 million a year earlier. The drop was due to Target's reduced investment in the portfolio and to a higher bad debt expense resulting from higher write-offs in the current period and additions to the reserve for the future.
In May, Target closed its transaction to sell 47 percent of its credit card receivables to JPMorgan Chase for $3.6 billion.
Chief Financial Officer Doug Scovanner told investors that while the company is comfortable with meeting full-year Wall Street guidance, the third quarter is presenting a challenge amid erratic sales patterns in August.
For August, Target estimates same-store sales declines from 1 percent to 3 percent. Scovanner told analysts that sales were weak in the first 10 days of the month but have since improved. For the third quarter, it expects same-store sales to be unchanged from the year-ago period.
Analysts surveyed by Thomson Reuters expects Target to earn $3.42 per share for the full year and 56 cents per share for the third quarter.
Target also told investors that the company plans to open 70 to 75 stores in 2009, down from a pace of 90 to 95 stores in the current fiscal year. Scovanner said that the slower pace reflects a soft economic environment as well as challenges among its outside real estate development partners who have run into hurdles in obtaining funding or filling in space in some mall projects that were expected to open in 2009.
Wal-Mart reported its own results Thursday, raising its full-year earnings forecast after second-quarter profit rose more than expected, helped by tight inventory controls and a renewed focus on low prices. But the company predicted slower same-store sales growth in the U.S. for the current quarter, as the benefits of the federal stimulus checks dry up and customers find it more difficult to stretch their paycheck to the next payday.
