Target’s Profit Trails Estimates on Poor Holiday Sales

Target Corp., the second-largest U.S. discount chain, said sales this month started slowly as shoppers face higher gas prices and payroll taxes, mirroring what Wal-Mart Stores Inc. reported last week.

Wal-Mart, the world’s largest retailer, said on Feb. 21 that same-store sales this quarter will be little changed because of a slowdown this month. Target today said revenue by that measure for the first quarter may also be little changed or gain as much as 2 percent. The retailer said revenue for the year would advance about 2 percent, trailing analysts’ estimates for an increase of 3.9 percent.

“Given these new challenges facing an already-sluggish economy, we have a tempered view of the near-term sales environment,” Target Chief Executive Officer Gregg Steinhafel said on a call with analysts today. “While there are some encouraging signs in the housing markets, volatility and consumer confidence, the payroll tax increase and rise in the price of gas all present incremental headwinds.”

Target, based in Minneapolis, fell 1.5 percent to $63.12 at the close in New York. The shares gained 14 percent in the past 12 months compared with an increase of 11 percent for the Standard & Poor’s 500 Index.

Holiday Slump

The tepid revenue this month came after December’s same-store sales, a key measure of a retailer’s growth because only established locations are counted, were little changed after declining in November. They gained 0.4 percent for the fourth quarter, its worst performance for the period since 2008.

Steinhafel struggled to increase sales during the holidays after a luxury goods line co-branded with Neiman Marcus Group Inc. flopped with shoppers. In an effort to drive store visits and sales after the rush during the Thanksgiving weekend, Target released the line in early December. The collection. by designers such as Tory Burch and Jason Wu, was discounted by 50 percent within weeks and then marked down 70 percent after Christmas.

Target today reported a 2 percent decline in fourth-quarter profit. Net income in the quarter ended Feb. 2 fell to $961 million from $981 million a year earlier, the company said in a statement. Profit per share rose 2 cents to $1.47 as the number of shares outstanding decreased. Analysts projected $1.48, the average of estimates compiled by Bloomberg.

Shrinking Margin

“The quarter wasn’t that great,” Ian Gordon, an analyst for Standard & Poor’s in New York, said in an interview. He cited a forecast in January, when the retailer said it may meet or “somewhat exceed” the low-end of its guidance, which was $1.45 a share.

Steinhafel has said that the retailer would try to balance revenue growth with profitability by not chasing sales with as many markdowns. That didn’t happen either as margins declined again, said Gordon, who has a buy rating on the shares.

Last quarter “was seemingly contradictory” to that stance, Gordon said. “It doesn’t jive with them not playing the promotional game.”

Retail gross margin, the percentage of sales left after subtracting the cost of goods sold, narrowed in the fourth quarter to 27.8 percent from 28.4 percent. That marked the 10th straight drop. Gordon projected a decline of 0.1 percent.

More Promotions

Sean Naughton, an analyst at Piper Jaffray Cos. in New York with an overweight rating on the shares, said in a note that the shrinking margin “was due to a more promotional holiday than originally anticipated.”

Target also forecast first-quarter profit that was higher than analysts’ estimates. Earnings per share will be $1.10 to $1.20 excluding some one-time items, Target said. Analysts projected $1.06, the average of estimates compiled by Bloomberg.

Wal-Mart this month projected first-quarter profit that trailed analysts’ estimates.

Target’s sales rose 6.8 percent to $22.7 billion in the fourth quarter, matching the average of analysts’ estimates. For the quarter, transactions declined 1 percent, the first drop since the second quarter of 2009, according to David Strasser, an analyst with Janney Montgomery Scott LLC in New York. Strasser has a buy rating on the shares.

The company will beginning opening its first stores outside the U.S. in Canada in April. By the holidays, it expects to have more than 120 open. In the U.S., it will add as many as 20 stores including three City Targets, an urban format it unveiled last year with five locations.

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