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Soft sales, higher costs dent Target’s profit

With first-quarter profits down 8 percent and the economy in a funk, Target is emphasizing the “pay less” part its “Expect More, Pay Less” slogan.
/ Source: The Associated Press

With first-quarter profits down 8 percent and the economy in a funk, Target is emphasizing the “pay less” part its “Expect More, Pay Less” slogan.

The nation’s second-largest discount retailer said softer-than-expected sales and higher costs caused the profit decline for the quarter that ended May 3, although the results beat Wall Street expectations.

With consumers tightening their belts, Target President and Chief Executive Gregg Steinhafel said on a conference call that Target is responding by stressing sale prices more in its advertising, especially the 50 million newspaper circulars it puts out, as well as with sale items at the end of its aisles.

“We’re just very mindful that the consumer is very cash-strapped right now and is looking for good values. They’re looking for more sale merchandise, and we are responding,” he said.

The company said profit margins declined slightly from last year because sales grew faster in low-margin categories, which generally includes food and essentials like paper towels.

“As gas and food prices continue to rise and housing markets slow, consumers are facing increased financial pressure and reducing their spending, especially in discretionary categories.”

Steinhafel said shoppers are increasingly buying replacement pillows and sheets rather than a whole new set. In its lawn and patio items, consumers are buying new seat cushions rather than all-new lawn furniture.

Target reported a profit of $602 million, or 74 cents per share, in the three months ended May 3, down from $651 million, or 75 cents per share, during the same period last year. Revenue rose 5 percent to $14.8 billion. Analysts surveyed by Thomson Financial expected a profit of 71 cents per share. on revenue of $14.92 billion.

Sales at established stores fell 0.7 percent. Retail profits not counting interest and taxes fell 2 percent to $959 million.

In its credit card operation, Target said it earned $199 million before interest and taxes, down almost 10 percent from a year ago.

Net credit card write-offs increased to an annualized rate of 7.6 percent, versus 6 percent a year ago. It wrote off $161 million in bad debts, up almost 62 percent from a year ago. Chief Financial Officer Doug Scovanner said the writeoffs were concentrated in four states hit hardest by the declining housing market: Florida, Arizona, Nevada, and California.

Target said it closed its transaction to sell 47 percent of its credit card receivables to JPMorgan Chase on Monday, for $3.6 billion.

Scovanner said the full-year median Thomson Financial consensus of $3.47 “lies within a reasonable range” but that Target expects the second quarter to be “somewhat softer” than the consensus median of 79 cents.

“Our topline growth will likely remain sluggish until we see some stability or improvement in the economic environment,” he said.

Steinhafel said Target is continuing with its plans to open 90 to 100 new stores this year.

“Unless this slowdown in consumer spending is protracted and goes on for some length of time, we remain committed to the growth levels that we have described in the past,” he said.

The company runs 1,613 Target stores in 47 states.