Target sales, profits fall as shoppers spend less

Target Corp. continues to batten down the hatches in hopes of riding out the stormy economy, even as the retailer on Tuesday reported faltering sales and profits in the first quarter.

Target said its net income dropped 7.5 percent to $602 million, or 74 cents a share, in the first quarter, which ended May 3. It was the third straight quarter that the Minneapolis-based retailer saw profits drop. Earnings were down a penny from $651 million a year ago.

But Wall Street appears to be backing this stick-to-the-plan approach, as Target shares finished the day down a little more than 1 percent, at $54.29.

"At some point you have to say, the water is rough and we're really proud of you for keeping the sailboat upright," said Patricia Edwards, a retail portfolio manager with Wentworth Hauser & Violich in Seattle.

Indeed, Wall Street has low expectations all around -- and Target still fared better than many predicted. Retailers from Kohl's to Macy's to Nordstrom are seeing sales stagger as consumers face higher gas and food prices and falling home values. Wal-Mart and Costco are faring better as consumers shop for grocery bargains and low-priced basics.

Target also is showing a disciplined approach to holding down expenses and managing inventories, Edwards said. That helped the Minneapolis-based retailer avoid the massive markdowns Saks' resorted to in the first quarter just to clear out its upscale inventory.

"It's pretty clear they're holding to their strategy and not upending it by heavy price cutting," said David Brennan of the Institute for Retailing Excellence at the University of St. Thomas. "They're controlling their margin rather than total sales, which is why their [store sales] are dragging a bit."

In his first earnings conference call with analysts since taking over on May 1, CEO Gregg Steinhafel said the company would stay the course with 100 new store openings a year, and would continue to focus its advertising message on the "pay less" side of its "expect more, pay less" slogan.

"The customer is very cash-strapped right now and looking for values," Steinhafel said. "We are responding by ensuring that our assortments meet their desires."

Short-term sales ploys that have helped rival Wal-Mart draw in shoppers aren't in the cards for the retailer known for delivering high-fashion merchandise at a good price, Steinhafel said.

Target officials offered signs of how consumers are parsing out their thinning wallets. Instead of buying new patio furniture, shoppers are buying seat cushions. Instead of a bedroom makeover with new bedspread and pillow shams, people are buying new sheets.

Meanwhile, pharmacy items, groceries and other staples continue to bring in shoppers, especially those who are hoping to save gas by combining multiple shopping outings into a single trip.

Target also is pushing ahead with its aggressive program to repurchase $10 billion in stock. Target officials said it has reduced outstanding shares by 8 percent in the past six months -- $1.6 billion in the quarter -- and is on track to buy back half or more of its shares by the end of the year.

Chief Financial Officer Doug Scovanner said that concentrating ownership will support earnings growth as the retailer's share prices "recover from current levels."

But write-offs in its credit card portfolio increased to 7.6 percent, from 6 percent a year ago, as bill payments declined in Arizona, California, Florida and Nevada, which have been hard hit by the housing crisis.

Looking ahead, the company expects better sales growth in the second half of the year, though with the economy teetering, it's anybody's guess whether consumers will cooperate.

Jackie Crosby • 612-673-7335