Target's profits miss estimates

NEW YORK (CNNMoney.com) -- Target Corp., the nation's second-largest discount retailer after Wal-Mart, posted third-quarter earnings Tuesday that missed analysts' estimates as profits were dented by softer sales of pricier products.

The Minneapolis-based retailer said quarterly net earnings were $483 million, or 56 cents a share, down from $506 million, or 59 cents a share, in the same period a year ago.

Analysts, on average, had forecast earnings of 62 cents a share, according to earnings tracker Thomson First Call.

Target (Charts, Fortune 500) shares slumped 1.5 percent in afternoon trading Tuesday.

Total revenue in the quarter rose 9.3 percent to $14.82 billion from $13.57 billion in 2006, while third-quarter same-store sales increased 3.7 percent.

Target said sales benefited from new store openings in the period and well as its credit card operations.

Separately, Target also announced that its board authorized a new $10 billion share repurchase program.

"Our third-quarter earnings were disappointing due to soft sales in our higher margin categories, leading to lower-than-expected gross margin in our core retail operations," Target Chief Executive Bob Ulrich said in a statement.

"However, we have not observed any meaningful change in the intensity of the competitive environment and continue to believe that we are well-positioned to operate in a variety of sales environments going forward," he added.

Target executives told analysts, during a conference call to discuss the company's results, that higher-margin apparel and home-related goods suffered weaker-than-expected sales last quarter.

"We still expect some sales deterioration in the fourth quarter but not to the extent we saw in the third quarter," said Greg Steinhafel, president of Target stores.

Late Monday, Target confirmed that it expects sales at its stores open at least a year - a key measure of retail performance known as same-store sales - to increase in the low single-digit increase for November.

November and December are key holiday sales months for the merchants since they typically account for as much as 50 percent of retailers' annual profits and sales.

Steinhafel told analysts that he was "cautiously optimistic" about the 2007 holiday season which kicks off this week on Black Friday, or the day after Thanksgiving.

For the fourth quarter, Target expects same-store sales to increase between 3 to 5 percent.

Target did not provide profit or revenue guidance for the fourth quarter.

Analysts expect the retailer to earn $1.37 a share for the fourth quarter on sales of $20.7 billion and full-year profits to come in at $3.54 a share on revenue of $64.1 billion

Said Steinhafel, "We are excited about our must-have and differentiated items. We have limited edition products. We also have new gift cards that are expected to drive store traffic and transactions throughout the holidays."

He said winter clothing sales had picked up this month as temperatures dropped around the nation. "The home category is performing well this month. We think electronics will be the bellwether category during the holiday season," he said.

Toy sales continue to be volatile because of recalls, Steinhafel said. "But we are seeing strength in other categories as parents migrate to less traditional toys."

Regarding its credit card operations, Target's chief financial officer Doug Scovanner told analysts that the company would decide by the end of December about whether to sell its credit-card receivables.

The retailer announced in September that it was considering selling $7 billion in credit-card assets.

"We are continuing to evaluate whether the benefits of a potential transaction outweigh its expected dilutive impact on earnings per share," Scovanner said.