Target: Cheap Chic Out of Style

The retailer missed quarterly forecasts due to soft sales of apparel and home goods as pinched consumers rejected higher-margin, designer offerings

High fashion and trendy home goods aren't too alluring when the American consumer is under enormous pressure from high oil prices and tighter credit.

Target (TGT), the discount chain known for chic apparel from high-end designers such as Isaac Mizrahi and home furnishings from upmarket names including Thomas O'Brien and Cynthia Rowley, saw its fiscal third-quarter net income drop 4.5%, to $483 million—short of forecasts. Revenues rose 9%, to $14.84 billion. "Our performance for the period includes soft sales in our higher-margin apparel and home categories…leading to disappointing overall earnings," Chief Executive Robert Ulrich said in a Nov. 20 conference call about the Minnesota retailer's quarterly earnings. Wall Street did not like what it heard, pummeling the shares by 4.1% to a 52-week low of $51.69. Target shares are off more than 9% this year.

Compare that to last week's bull run (, 11/13/07) for the stock of rival Wal-Mart Stores (WMT). After trading near 52-week lows of $43 for weeks, Wal-Mart's stock has soared 6%, to $46, about where it continues to trade now. That's after the mammoth retailer last week reported a 7.9% increase in net income as its core low-income shopper loaded up on goods, which the store has been offering at deep discounts. "[In the fourth quarter] we would expect to do at least $100 billion, our first $100 billion quarter, certainly a record for Wal-Mart," said Wal-Mart CEO H. Lee Scott at the company's prerecorded call to discuss earnings. "What drives that is the Wal-Mart low-cost, low-price model that allows us to continue to be more and more relevant to our customers. Times are a little tougher than they were a year ago, and consumers are particularly appreciative that they can count on Wal-Mart to save them money."

Consumers Go Basic

That wasn't the first time Scott has said that. But this time, investors want to believe him. And that's because the headline numbers from all around just don't look good—whether it's $100 oil, the housing meltdown, the multibillion-dollar losses at investment banks, or the stock market roller coaster. "People are waiting for good news and not getting it," says Robert Passikoff, president of Brand Keys, a brand consulting firm in New York. In a Brand Keys holiday spending survey of 16,000 consumers, 30% of the respondents said they were going to spend less, compared with 15% last year. "For the first time in six years, we basically have double the amount of people that actually say they feel like spending less," says Passikoff.

Consumers are also giving signals (, 11/14/07) they are rejecting the fanciful and opting for basics when it comes to apparel and home goods. Target saw people turn away from its hip designer offerings, and an executive noted that shoppers were even "trading down" on items for the home. But Wal-Mart saw sales rise in both these categories, areas in which it has been struggling for more than a year as consumers last year spurned its trendy fashion line of Metro 7. Wal-Mart is now back to basics, and consumers are responding. "We already are seeing double-digit sales increases in our 'Express for Less' program and our '10/10/10' apparel program," says Eduardo Castro-Wright, CEO of Wal-Mart's U.S. division, referring to sales of clothing items that are priced $10 or less and clothing items emblazoned with Disney characters or slogans.

Advantage Wal-Mart

Clearly, Wall Street believes these are ample signals consumers are tightening their belts and the best way to combat that is low prices. And, of course, who can beat Wal-Mart at that proposition? "Wal-Mart is well positioned to combat a tougher spending environment," Goldman Sachs (GS) analyst Adrienne Shapira wrote in a research report. But even Wal-Mart isn't sure customers will walk in its doors that easily and is besting itself this year with sales akin to "Black Friday," or post-Thanksgiving, that kicked off as early as Halloween. The retailer is even resorting to such gags as petitioning Martin Rees, the Astronomer Royal at London's Royal National Observatory, to declare the Saturday after this Thanksgiving also be named a "Friday," giving the week two Black Fridays. Whatever it takes.

In the current era of caution, Wal-Mart is probably the only retailer that has managed to give Wall Street some hope. Even luxury retailer Saks (SKS), which on Nov. 20 announced its third-quarter profits tripled to $21.6 million and same-store sales increased 11.4%, failed to excite investors. Its shares dipped 1.5%, to $19.83.

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