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Target cautious after weak holiday quarter, shares fall

Shoppers enter a Target store in Arvada, Colorado February 24, 2009. REUTERS/Rick Wilking
Shoppers enter a Target store in Arvada, Colorado February 24, 2009. REUTERS/Rick Wilking

By Jessica Wohl

(Reuters) - Target Corp on Wednesday offered a cautious outlook for consumer spending in 2013 following a weak holiday quarter and said it was on track with its massive Canadian store opening plans this year.

The discount retailer's fourth-quarter profit fell short of Wall Street expectations as the number of purchases dropped 1 percent, the first such decline in 14 quarters.

Its shares fell nearly 1 percent at $63.46 after dropping as much as 3.7 percent.

"The U.S. economy is growing at a painfully slow rate," Chief Executive Gregg Steinhafel said on a conference call.

"We have a tempered view of the near-term sales environment," he said, adding that shoppers, or "guests" as Target calls them, are "quite resilient."

Target's sales started off softly in February, similar to results at rival Wal-Mart Stores Inc , though things improved as the month progressed.

Target is testing programs such as letting shoppers pay online and pick up in-store, or have items delivered on the same day as well as catering to customers using mobile devices. Some of the plans discussed on Wednesday were similar to efforts already tested or rolled out by Walmart.

Target will have a transition year: It is selling its credit card portfolio to Toronto-Dominion Bank this quarter and opening 124 Canadian stores, more than it has ever handled in a single year.

The Canada plans cut earnings by 48 cents per share in 2012 and should trim earnings by about 45 cents in 2013.

'LINKED WITH ECONOMY'

Target expects sales to rise about 2 percent this year, down from 5.1 percent growth last year, which had an extra sales week. Sales at stores open at least a year should rise in line with 2012's 2.7 percent increase.

The fourth-quarter marked Target's weakest holiday season performance since 2008, and some strength in January helped prop up what could have been even weaker numbers, said Sandy Skrovan, U.S. research director at Planet Retail.

"Walmart proved the victor over Target for the 2012 holiday season," Skrovan said, pointing out that Walmart U.S. same-store sales rose 1 percent in the quarter. "But Target won the year overall since, unlike Walmart, its affluent shopper base tends to be more insulated from economic swings."

While food and other basics sold well, shoppers held back from discretionary purchases like toys in an uncertain economy. Shoppers bought 0.7 percent more each time they shopped and the average spent was up 1.4 percent.

"Given the size of the company, anything that they do is linked inextricably with the economy," said Cowen & Co analyst Faye Landes. "In addition, they are in the fashion business and that business is clearly not without risk."

Target's holiday season included a disappointing showing for its collection of gifts sold in collaboration with high-end department store chain Neiman Marcus . The line that included designer dresses and dishes launched on December 1, and Target sharply discounted the goods even before Christmas.

Wal-Mart said last week that Walmart U.S. same-store sales were likely to be flat this quarter as consumers faced higher gasoline prices and smaller paychecks after the expiration of the U.S. payroll tax cut.

At Target, more shoppers used its credit and debit cards. The cards offer a 5 percent discount to foster customer loyalty, but the discount can also pressure margins.

Target said 15.5 percent of store sales during the quarter were paid with its cards, up from 14 percent in the third quarter and 10.8 percent a year earlier.

The fourth-quarter gross margin declined to 27.8 percent of sales from 28.4 percent a year earlier, due to the increased card usage, remodeling and markdowns on seasonal merchandise.

Target earned $961 million, or $1.47 per share, in the quarter, down from $981 million, or $1.45 per share, a year earlier. Target had fewer shares outstanding in the latest period.

Analysts, on average, expected earnings of $1.48 per share, according to Thomson Reuters I/B/E/S.

Adjusted earnings per share, excluding items such as costs related to Canada, rose to $1.65 from $1.49 a year ago.

Target tempered profit expectations back in early January, when it said earnings would just meet or somewhat exceed the low end of its prior view for net earnings of $1.45 to $1.55 per share and adjusted profit of $1.64 to $1.74 per share.

For the current year, Target forecast adjusted earnings of $4.85 to $5.05 per share, which would exceed the $4.76 it earned last year. It forecast first-quarter adjusted earnings of $1.10 to $1.20 per share versus $1.11 a year ago.

It was not immediately clear how the company's profit forecast compared to analysts' expectations.

Target previously said fourth-quarter sales rose 6.8 percent to $22.37 billion, with same-store sales up 0.4 percent. Same-store sales missed analysts' average target of 0.8 percent.

Meanwhile, Dollar Tree Inc , which sells low-priced items, said fourth-quarter sales soared 15.4 percent as it opens more stores and sells more food. Its shares jumped 12.5 percent.

(Reporting by Jessica Wohl in Chicago; Editing by Jeffrey Benkoe)

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