Target shares drop on slowed fourth quarter

Target Corp.'s Neiman Marcus collaboration did not turn out to be a holiday gift to the retailer.

The No. 2 discount chain reported that its fourth-quarter net income dipped 2 percent as it dealt with intense competition during the crucial holiday season.

"Target did not do as well as they were anticipating," said Amy Koo, an analyst at Kantar Retail in Boston, noting that sales would not have been even as strong as they were without an extra week in the fourth quarter compared to a year ago.

For 2013, the Minneapolis-based retailer is anticipating a 2.7 percent annual sales increase for comparable stores, down from the 3 percent it previously anticipated for the coming five years, Koo said.

Fourth-quarter sales "fell short of our expectations," Target CEO Gregg Steinhafel told analysts on a conference call. But he said he was "very pleased with our fourth-quarter financial performance, which reflects outstanding execution by our team during a volatile and promotional holiday season." The company said it expects up to 2 percent growth in same-store sales in the current quarter.

The big-box retailer, known for its cheap but trendy merchandise, had high hopes for the collection of gifts made in partnership with luxury department store Neiman Marcus. The pair of retailers rolled out the line of gifts from 24 designers, including Oscar de la Renta and Diane von Furstenberg, on Dec. 1. But just weeks later, Target was offering big discounts — up to 75 percent off — to clear the shelves of unsold merchandise.

Also, during the critical shopping months of November and December, Target embraced a number of different strategies, like matching the price of online competitors such as Amazon.com, Walmart.com, Bestbuy.com and Toysrus.com. It was an attempt to combat "showrooming," in which people use smartphones while they're in stores to look for cheaper prices online.

Target earned $961 million, or $1.47 per share, in the fourth quarter ended Feb. 2, down from $981 million, or $1.45 per share, a year earlier. But adjusted earnings were $1.65 per share, exceeding analysts' expectation of $1.48. Fourth-quarter revenue rose 7 percent to $22.73 billion.

For the full year, Target earned $3 billion, or $4.52 per share, compared with $2.93 billion, or $4.28 per share a year ago.

Analysts said Target's fourth-quarter profits were hurt when the company was forced to take big discounts to clear out Neiman Marcus brands, and by slow sales of seasonal merchandise.

In addition, Koo said Target was hurt by lack of interest in its price-matching plan that was a defensive move against Amazon and Wal-Mart. Relatively few Target customers participated in the price-matching plan, she said.

Based on the fourth quarter, the company said it is adjusting to cope with a weak economy.

But Koo said the economy can't be an excuse not to do well. "Target needs to figure out how to grow robustly in this economy," Koo said.

For the future, Target is "doubling down" on its strategy of catering to customers with higher disposable incomes who are loyal Target customers, Koo said.

"I think what Target learned coming out of the recession is that they've got to concentrate on their best customers who are more able to spend," Koo said. "Even though they are a mass retailer, they can't be everything to everybody."