Target's Earnings Tumble 24 Percent

Retailer Sees Consumers Shift from Buying Indulgences to Necessities

Target reported yesterday that its third-quarter profit plunged nearly 24 percent as beleaguered shoppers held on to their wallets and its credit card division continued to suffer.

The economic downturn also affected home improvement chain Lowe's, which posted a 24 percent drop in earnings, though its performance was better than the company had expected.

Target's results represent the fifth consecutive quarter in which the Minneapolis-based retailer posted a decline in earnings. Target reported $369 million in profit during the third quarter compared with $483 million during the comparable period last year. Total sales were $14.6 billion, up 1.7 percent from last year. Diluted earnings per share were down 14 percent, to 49 cents from 56 cents.

Target, known for its cheap chic merchandise, has struggled to attract shoppers who are cutting out indulgences such as fancy teapots and trendy clothes to hunt for low-priced necessities. Sales at stores open at least a year -- a key measure of the health of a retailer -- were down 3.3 percent during the third quarter compared with the same period last year.

Meanwhile, rival Wal-Mart had same-store sales growth of 3 percent during the third quarter, excluding fuel. Earnings grew nearly 10 percent, to $3.1 billion from $2.9 billion.

"The dilemma is that the Target formula is not broken," said C. Britt Beemer, chairman of America's Research Group, a consumer behavior research firm. "It's just Target is more vulnerable in this time when people shift away from apparel to go to commodities."

Analysts have attributed more than one-fifth of Target's revenue to apparel sales, which has been particularly hard hit by the downturn. In addition, Target's credit card division has been battered by a rising number of delinquencies. The company said it is tightening underwriting standards, reducing some customers' credit lines and more aggressively pursuing collections.

Earnings from the credit card segment fell 83 percent in the third quarter to $35 million from $202 million last year. The drop also reflects Target's sale of roughly half of its credit card receivables to J.P. Morgan Chase in May.

Target chief executive Gregg Steinhafel said the retailer is emphasizing low prices on basic merchandise to drive sales during the critical holiday shopping season. The company said it will make several dramatic price cuts and introduce new products that cost less than $20.

"We're going to be right with the best of them on a promotional standpoint," Steinhafel said during a conference call with analysts yesterday. "We are going to be with Wal-Mart on an everyday basis."

Target said it planned to do battle in toys, electronics and entertainment merchandise, which has collectively accounted for about one-third of its holiday sales historically. But the company said it was worried it could be stuck with too much inventory if customers fail to materialize. To help conserve cash, Target has suspended its share repurchase program and plans to cut capital expenditures for fiscal year 2009 by about $1 billion.

"Our entire Target organization is focused on providing compelling reasons for our guests to shop at Target in these difficult times," Steinhafel said.

Target shares closed yesterday at $31.68, down 4 percent or $1.35.

Lowe's, whose third-quarter profit fell from $643 million to $488 million, said consumers continued to delay home improvement projects and big-ticket purchases, driving same-store sales down nearly 6 percent. The company said home maintenance and outdoor merchandise held up relatively well.

Lowe's shares closed yesterday at $18.99, up 4 percent or 76 cents.