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Target quarterly profit falls 7.5 percent

20/05/2008 - 15:21
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TARGET 52,07 +1,15%

By Nicole Maestri

NEW YORK (Reuters) - TARGET(TGT.NY)Corp reported a 7.5 percent decline in quarterly profit on Tuesday as shoppers passed over clothes and jewelry in favor of basics like food, hurting the retailer's margins.

The No. 2 U.S. discount chain behind Wal-Mart Stores Inc said profit was $602 million, or 74 cents per share, for its fiscal first quarter ended May 3, down from $651 million, or 75 cents per share, a year earlier.

Analysts, on average, had been expecting earnings of 71 cents per share, according to Reuters Estimates.

"It paints to me a picture of a company that is feeling the stresses and strains of the economic environment," said Matthew Kaufler, portfolio manager of the Touchstone Value Opportunities Fund, of Target's falling profit.

Target has carved a niche for itself selling cheap but chic designer clothes and home decor, appealing to aspirational lower- and middle-income consumers looking for the latest trends.

But as the U.S. economy has faltered, so too have Target's sales, particularly of higher-margin items, as shoppers forgo purchases of new clothes and home furnishings to concentrate on necessities.

Sales, excluding credit card revenue, rose 5 percent to $14.3 billion, boosted by new stores openings. But sales at stores open at least a year, a key retail gauge known as same-store sales, fell 0.7 percent.

Its first-quarter gross margin rate declined from last year, driven by faster sales growth in lower-margin merchandise. it said.

Kaufler said Target has become a victim of its success now that shoppers may have to forgo buying those designer items, like Isaac Mizrahi dresses or DwellStudio sheets, that Target has become well-known for selling.

"It may argue that they're going to have to ... move out of some of those areas where the discretionary dollars have come under greater pressure and try to move into areas of more immediate need to customers," he said.

"Or in the absence of that, possibly take prices down a little to be more competitive."

CREDIT CARD REVENUE JUMPS

Quarterly credit card revenue rose almost 20 percent to $500 million.

Target, which has been under pressure from activist investor William Ackman to boost its stock price, said earlier this month that it would sell a 47 percent interest in its credit card business to JPMorgan Chase for an initial investment of $3.6 billion.

It said the deal would allow it to fund its business plans, including its share repurchase program, without having to access debt markets again this year.

In its latest quarter, Target repurchased 30.5 million shares of its stock. The retailer has been buying back shares as part of a $10 billion share repurchase plan announced in November.

Its stock has fallen almost 6 percent in the past year through Monday, while Wal-Mart is up 19 percent and the Standard & Poor's Retail Index <.RLX> is down 21 percent.

Target shares were up 8 cents at $55 in early New York Stock Exchange trading.

(Reporting by Nicole Maestri, editing by John Wallace and Dave Zimmerman)


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