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Target Posts Surprise Profit Drop On Weaker Sales

Target posted a surprise drop in quarterly profit after weak sales of higher-margin merchandise like clothing hurt its results heading into the holidays, and the discount retailer announced a new $10 billion share repurchase program.

Its shares fell on the New York Stock Exchange.

"Our third-quarter earnings were disappointing due to soft sales in our higher margin categories, leading to lower-than-expected gross margin in our core retail operations," said Chairman Bob Ulrich in a statement.

Shoppers check out at a newly-opened Target store near Royersford, Pa., on Monday, Nov. 13, 2006. Discount retailer Target Corp. said Tuesday its third-quarter profit rose 16 percent, beating analyst expectations as its sales rose 11 percent. (AP Photo/George Widman)
George Widman
Shoppers check out at a newly-opened Target store near Royersford, Pa., on Monday, Nov. 13, 2006. Discount retailer Target Corp. said Tuesday its third-quarter profit rose 16 percent, beating analyst expectations as its sales rose 11 percent. (AP Photo/George Widman)

Target, the No. 2 U.S discount retailer behind Wal-Mart Stores, said earnings fell to $483 million, or 56 cents per share, for the third quarter ended Nov. 3, from $506 million, or 59 cents per share a year earlier.

Analysts, on average, had been expecting it to earn 62 cents per share, according to Reuters Estimates.

Investors are keeping a close watch on retailers' results, worried that consumers are reining in their spending heading into the holidays in the face of higher food and fuel costs, the U.S. housing market slowdown and credit crunch.

Still Competitive

Ulrich said the retailer had not seen "any meaningful change in the intensity of the competitive environment," and it is "well-positioned to operate in a variety of sales environments going forward."

Target's results come a week after Wal-Mart posted a higher-than-expected 8 percent increase in its third-quarter profit, after it controlled expenses and cut prices to drive shoppers into its U.S. stores earlier than ever for holiday shopping.

Target's sales at stores open at least a year, a key retail gauge known as same-store sales, have been outpacing those at rival Wal-Mart in recent quarters, partly because it caters to
wealthier customers who are drawn to its "cheap chic" clothing and home decor.

But its shoppers have not been immune to economic pressures. Twice during the quarter, Target lowered its monthly same-store forecast after fewer shoppers came to its stores and
sales were weak in higher-margin categories.

In the quarter, total revenue, which includes retail sales and credit card revenue, rose more than 9 percent to $14.84 billion from $13.57 billion.

Sales at its stores open at least a year rose 3.7 percent. In the comparable quarter a year ago, same-store sales rose 4.6 percent.

In September, Target, which has been under pressure from activist investor Bill Ackman to boost its stock price, said it was considering selling $7 billion in credit-card assets.

Still Evaluating Deal

On Tuesday it said it was evaluating "whether the benefits of a potential transaction outweigh its expected dilutive impact on earnings per share."

"At this point in the review, it is clear that if a transaction occurs, it would involve sharing a meaningful portion of our future pre-tax credit card contribution with a new partner," said Doug Scovanner, chief financial officer, in a statement.

Target also said in September that it would examine future share repurchases.

The new $10 billion share buyback program it announced on Tuesday replaces its prior authorization, and Target said it represents more than 20 percent of outstanding shares, based on its recent stock price.

Target said the buyback program is expected to be completed within three years, but based on current conditions, a "significant portion" of the program is expected to be completed by the end of 2008.

The repurchases "will be partially funded by an increase in the use of debt in our capital structure," Ulrich said.