Target's profits and outlook dive

Target Corp., struggling to convince consumers it is both hip and affordable, joined the chorus of retailers reporting dismal sales and a cheerless outlook for the critical holiday season.

The Minneapolis-based retailer said profit plunged 24 percent in the three months ending Nov. 1. Sales at stores open at least a year fell 3.3 percent, and debt-burdened credit card holders struggled to stay current on their bills.

"Right now, the consumer is more than hesitant," Target CEO Gregg Steinhafel said in a conference call with analysts. "They're very stressed. We, like other retailers, are struggling from the inability to motivate and inspire people to come into our stores."

In one of the strongest signs that the Minneapolis-based company is digging in for an extended downturn in consumer spending, Target said it will suspend its share buyback program and scale back plans for new store openings likely through July 2010. In all, Target will trim $1 billion from its $4 billion capital investments budget in 2009.

"That's a pretty sizable amount," said David Heupel, a portfolio manager for Thrivent Asset Management in Minneapolis. "That tells you something about their outlook. ... I'm a bit surprised they're doing it at this point in the game, without even waiting to see how the holiday shapes up."

Target's third-quarter profit was $369 million, or 49 cents a share, from $483 million last year. Earnings were slightly higher than many analysts had predicted, but revenue rose just 2 percent to $15 billion, which was lower than expected.

Company leaders didn't offer much insight into expectations for the fourth quarter, but noted that November sales are running well below previous projections of negative 6 to negative 9 percent.

To deal with higher than expected bad debt expense, Target said it bumped up its reserves $104 million over the quarter to cover write-off amounts. Chief Financial Officer Doug Scovanner predicted write-offs would peak in the second quarter of 2009 "give or take a quarter" before trailing off.

Target is walking a line between staying true to the things that make it stand out -- its originality and value -- while reining in costs at a time when worried consumers aren't easily tempted to buy beyond the necessities.

Though sales of food, health and beauty products rose 10 percent in the quarter, they make up a smaller percentage of sales than do high-profit products such as home furnishings and apparel, which account for nearly 40 percent of revenue. Sales in those categories have dropped in the mid-single digits.

Target's executives are taking the long view, and insist that trendiness and thriftiness are not incompatible virtues.

"We are not going to dumb down our assortment in this economy," Steinhafel said. "We're going to maintain our commitment to new product introduction, emerging designers and having what our guests want overall."

It will continue to match Wal-Mart on price, and many of Target's new introductions will be under $20. Target plans to push exclusive deals in its circulars and online for toys, electronics and entertainment, which make up a third of the company's holiday sales.

Consumer wariness also has been felt at Target.com, which had been seeing double-digit growth for several years. Steinhafel said the site will offer exclusive one-day sales to counter declines in traffic and sales.

"We expect this holiday to be equally if not more aggressive than prior holiday seasons," Steinhafel said. "I think there will be perhaps as slightly heightened sense of desperation by some of the other retailers. ... We're going to be right with the best of them from a promotional standpoint."