Slow sales push Target earnings down 8.1 percent

Target Corp. posted mediocre fourth-quarter earnings Tuesday but turned its efforts toward jazzing up spring offerings and keeping a lid on expenses as it tries to ride out the economic woes that have kept shoppers out of its stores.

Like other grocers, it's also increasing food prices, hoping to pass on some of its higher costs to consumers. But President Gregg Steinhafel said in a conference call with analysts that he'll see how that shakes out in the next 60 to 90 days, as the company maintains its commitment to match rival Wal-Mart Stores on most prices.

Target's quarterly sales growth at stores open for a year or longer grew 0.2 percent, marking the first time in more than three years that the company has failed to outperform Wal-Mart.

In the past, Target has been able to bank on its image as a trend-setter for people on tight budgets. The company said it intends to keep looking for ways to wow customers, even as discretionary spending has ebbed to a near-trickle for the hard-hit middle class.

On Sunday, it will launch the latest Go International offerings from emerging designers Milla Jovavich and Carmen Hawk. A line of organic cosmetics is in the works, and on March 23, a new line of jewelry by Justin Giunta will be launched.

"They don't want to go too far out on a limb with discretionary product categories like apparel or home furnishings," said Stephanie Hoff, an analyst with Edward Jones in New York. "In a recessionary environment, they could get stuck with a lot of excess inventory if they made too many big bets in areas like that."

Target reported an 8.1 percent decline in fourth-quarter profits, as sales skidded on high-margin goods such as home furnishings and clothing. For the quarter ended Feb. 2, the Minneapolis-based retailer reported net income of $1.03 billion, or $1.23 a share, down from $1.12 billion, or $1.29 a share a year ago. Sales increased 0.8 percent to $19.8 billion in the quarter.

Target officials told analysts it would cope with what it expects to be a lingering slowdown of consumer spending by sticking to its core business plan and managing payroll and other expenses.

"They want to make sure they're doing all the blocking and tackling right," Hoff said. "I think 2008 is going to be a year where they'll be doing all they can just to keep the stores clean, and the merchandise appealing and in stock."

Analysts and Wall Street investors apparently agreed with the company's stick-to-the-plan approach, as Target stock finished the day up more than 3 percent, at $54.89.

"I think they're very well-positioned still," said Joseph Beaulieu, an analyst with Morningstar in Chicago. "But if, at the end of the day their customers aren't spending money, they're going to get hurt."

Target intends to open 116 new stores next year, including two in Anchorage, Alaska, one of three states in which it currently has no stores.

The company intends to announce whether it will sell its credit-card receivables by the end of the first quarter. While Beaulieu and Hoff said they didn't see any red flags, consumers continue to be stretched thin and the value of Target's portfolio becomes less attractive.

"Seems to me they're being pushed into looking at this transaction," said Beaulieu, who stopped short of predicting that the sale won't go through. "Given what we're seeing industrywide, this is probably not the time to profitably unload a credit card business."

Jackie Crosby • 612-673-7335