updated 8/19/2008 10:30:16 AM ET 2008-08-19T14:30:16

Target Corp. reported a 7.6 percent drop in second-quarter profit Tuesday as its financially squeezed consumers focused on necessities like milk and paper towels and had trouble making their monthly credit card payments.

The Minneapolis-based discounter said its earnings slipped to $634 million, or 82 cents per share, for the three-month period ended Aug. 2. That compares with a profit of $686 million, or 81 cents per share, a year earlier.

Sales grew 5.7 percent to $15 billion from $14.2 billion in the year-ago period. Same-store sales, or sales at stores opened at least a year, slipped 0.4 percent. Same-store sales are considered a key indicator of a retailer’s health.

Analysts surveyed by Thomson Reuters had expected a profit of 76 cents per share on revenue of $15.46 billion.

Target had for several years outperformed its rival Wal-Mart Stores Inc., the world’s largest retailer, but has been stumbling in recent months largely due to its heavier emphasis on nonessentials like clothing and home furnishings.

The company said that gross profit margin rates fell moderately from last year, because sales grew faster in low-margin categories — which generally include food and essentials like paper goods.

In its credit card operation, Target said it earned $74 million, down 65 percent from $213 million a year earlier. The drop was due to Target’s reduced investment in the portfolio and to a higher bad debt expense resulting from higher write-offs in the current period and additions to the reserve for the future.

In May, Target closed its transaction to sell 47 percent of its credit card receivables to JPMorgan Chase for $3.6 billion.

Wal-Mart reported its own results Thursday, raising its full-year earnings forecast after second-quarter profit rose more than expected, helped by tight inventory controls and a renewed focus on low prices. But the company predicted slower same-store sales growth in the U.S. for the current quarter, as the benefits of the federal stimulus checks dry up and customers find it more difficult to stretch their paycheck to the next payday.

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