Consumer cutbacks nick Target

  • Article by: JACKIE CROSBY , Star Tribune
  • Updated: August 19, 2008 - 9:31 PM

Sales are flat and the retailer's credit card business is hurting.

The slumping economy continues to batter Target Corp. as well as its customers. Shoppers not only aren't coming into stores as often, but they're having more trouble than ever paying their credit card bills.

As Target released its second-quarter earnings Tuesday, the Minneapolis-based discount retailer said it will not meet long-term expectations if consumer cutbacks continue. Part of the problem is that, much as Target has tried to trump up the "pay less" side of its slogan, consumers don't believe it.

"The perception is that because it's more visually appealing than Wal-Mart, that prices are higher," said Stephanie Hoff, a retail analyst with Edward Jones in New York. "They're just going to have to figure out a way to communicate that to their customers better. They're trying to do that, but it could take some time."

Profit fell 7.6 percent to $634 million in the quarter ended Aug. 2, the fourth straight quarterly drop. Earnings per share, buttressed by a share-buyback program, increased 2.4 percent to 82 cents. Results still beat Wall Street's projections.

Sales among stores open at least a year, a key financial measurement for retailers, rose just 0.4 percent, marking the third straight quarter in which Target's changes in sales have hovered above or below zero. Traffic has declined 1 to 2 percent.

Target acknowledges its results put it in the middle of the class among retailers. Discounters Wal-Mart, Costco and Sam's Club earn high marks from cash-strapped consumers while department stores and luxury chains are falling well behind the curve.

Target, which had resisted scaling back expansion even as other retailers announced fewer openings and more closings, finally succumbed to the sour economy. In 2009 it will open 70 to 75 stores, a third fewer than planned. Hoff had been expecting even fewer openings.

"It's expensive to open new stores," Hoff said. "There are upfront costs you aren't recouping. The environment is challenging -- even developers are struggling -- so that makes it harder to find good locations to open stores."

Additionally, Target's normally robust credit card operations suffered a rash decline in the quarter. Profit from operations fell to $74 million, down 65 percent from a year ago, and write-offs more than doubled to $256 million from $95 million.

Target sold nearly half of its credit card loans to J.P. Morgan Chase in May for $3.6 billion, though it maintained control of all aspects of its financial services, including customer service and marketing.

Target Chief Financial Officer Doug Scovanner acknowledged that the trends were "modestly weaker than even we expected," with write-offs jumping to 8.7 percent of the portfolio compared with the 7 to 8 percent Target had forecast. Write-offs should remain elevated for at least a quarter or two and end the year in the 8 to 9 percent range, Scovanner predicted.

To try to recapture profit and limit its exposure to bad debt as credit card delinquencies rise, Target has been tightening terms with its cardholders -- raising late fees and annual rates, reducing credit limits, and putting customers through more rigorous screening.

In a telling sign of how tight credit has gotten for the consumer, Scovanner said that "for the first time in modern history," shoppers' use of credit cards at the cash register has declined in relation to cash and debit cards -- not just at Target but at stores nationwide. As credit card companies, including Target, ratchet consumers back, that lack of access to credit is hurting Target's sales, particularly among discretionary goods such as furniture and apparel, which make up about 40 percent of its retail mix.

Company executives warned that the third quarter doesn't look much better, but it anticipates a rebound in the fourth quarter and said annual earnings of $3.43 per share would be in the "reasonable range of likely outcomes," Scovanner said.

Sales in August, a leading indicator of future sales, have been volatile, according to Target and mirrored by figures released Tuesday from the International Council of Shopping Centers. The first 10 days were slow, but sales have picked up recently, perhaps as families gear up for the first day of school.

And Target, which originated the cheap chic formula, is pulling out the stops. It will unveil a record 22 national and international designers in stores by fall, said Target's top merchandising executive, Kathryn Tesija.

In a down day on Wall Street, Target shares fell 33 cents to $49.72.

Jackie Crosby • 612-673-7335

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