Nov. 17 (Bloomberg) -- Target Corp., the second-largest U.S. discount chain, said third-quarter profit fell as customers shunned higher-priced goods in favor of necessities and projected lower fourth-quarter earnings than some analysts had estimated.

Net income dropped 24 percent to $369 million, or 49 cents a share, in the quarter ended Nov. 1 from $483 million, or 56 cents, a year earlier, Minneapolis-based Target said today in a statement. That beat 20 analysts’ average estimate by 1 cent. The company also suspended its share buyback program and cut planned capital spending for 2009 by $1 billion.

Target plans to add more grocery items and offer “sharper” discounts to draw shoppers as they avoid purchases of jewelry, clothing and home goods, which account for more than 40 percent of the chain’s revenue. In the quarter, customers bought primarily groceries and drugstore items, categories that make up a larger proportion of sales at Wal-Mart Stores Inc., as they cope with rising joblessness and housing costs.

Target’s “in the same boat as everyone else,” said Jon Fisher, a fund manager at Fifth Third Asset Management in Minneapolis. The firm oversees $21 billion including Target shares. “Credit’s awful, sales trends are terrible, traffic’s terrible, guidance for this quarter’s coming down a lot.”

Fourth-Quarter Forecast

If sales at stores open at least a year decline in the “mid-single digits” on a percentage basis, Target may earn between 90 cents and $1 a share in the current quarter, Chief Financial Officer Douglas Scovanner said. Nineteen analysts surveyed by Bloomberg estimated profit of $1.22.

“Right now, the consumer is very hesitant,” Chief Executive Officer Gregg Steinhafel said during the company’s earnings call today. “They’re very stressed.”

Sales of clothing and home goods have been “sharply lower,” partly because of banks decreasing consumer credit limits, Scovanner said during the call.

“The tightening of credit has had a very adverse effect on our sales,” he said.

Target reined in expenses and widened its gross margin, the percentage of sales left after subtracting the cost of goods sold, even as it sold food and other necessities with smaller price increases.

‘Good Job’

Executives “are doing a good job,” Fisher said. “They’re doing what they can do.”

Target will continue “to underperform Wal-Mart” without “any meaningful recovery for the next few quarters,” Jeffrey Klinefelter, an analyst at Piper Jaffray Cos. in Minneapolis, said in a telephone interview before the earnings report. “People are simply spending less money on discretionary items.” He rates the shares “neutral.”

Target fell $1.35, or 4.1 percent, to $31.68 at 4:01 p.m. in New York Stock Exchange composite trading. That added to a 34 percent decline this year through last week, compared with an 11 percent gain at Wal-Mart and a 40 percent drop in the 27-company Standard & Poor’s 500 Retailing Index.

Revenue, including credit-card income, rose 1.9 percent to $15.1 billion. Sales at stores open at least a year dropped 3.3 percent in the quarter.

Wal-Mart’s third-quarter profit rose 9.8 percent to $3.14 billion, the Bentonville, Arkansas-based company said Nov. 13. Sales at locations open at least a year gained 2.7 percent at its U.S. discount stores.

Credit Card Unit

Profit from its credit-card unit fell 83 percent to $35 million because of “a decline in overall portfolio performance” along with lower interest rates and the sale of almost half of the loans to JPMorgan Chase & Co. earlier this year, Target said.

Scovanner cited a “continued deterioration” in delinquencies and write-offs of unpaid debt. He said he expects write-offs to peak in the second quarter of next year.

Last month, Pershing Square Capital Management LP hedge- fund manager William Ackman proposed placing the land under Target’s stores into an inflation-protected real estate investment trust that would lease the outlets to Target for 75 years. The proposal also involves selling the remainder of Target’s credit-card loans. Target said today it hasn’t yet made a decision on the plan. It previously said it has “serious concerns.”

“We see the potential value for shareholders for creating a separately traded REIT,” Klinefelter said. At the same time, “for there to be greater value for Target shareholders, the core retail business has to improve. You can’t fix this current stock price by splitting apart real estate.”

Ackman had also pressed Target to boost share buybacks, and the company announced a $10 billion program a year ago.

Target suspended the buybacks because it doesn’t want to jeopardize its short-term credit rating, Steinhafel said today.

“Everyone is in a capital-preservation build-cash mode,” Fisher said. “You don’t know how bad it’s going to be, you don’t know how long it’s going to last.”

To contact the reporters on this story: Lauren Coleman-Lochner in New York at llochner@bloomberg.net.

Last Updated: November 17, 2008 16:34 EST