Target Misses the Mark

Earnings fall short of estimates. The retailer plans a massive share buyback.
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Updated from 8:52 a.m. EST

Discount giant

Target

(TGT) - Get Report

reported a surprise 4.4% drop in third-quarter earnings as soft sales of high-margin goods hit the bottom line.

The Minneapolis-based retailer also approved the repurchase of up to 20% of its stock and said it is still deciding whether to sell its credit card business. Shares recently were down $1.01, or 1.9%, to $52.89.

For the quarter ended Nov. 3, Target earned $483 million, or 56 cents a share, down from $506 million, or 59 cents a share, a year earlier.

The results fell well short of analysts' average estimate for a profit of 62 cents a share, according to Thomson Financial.

Target's revenue rose to $14.84 billion from $13.57 billion a year earlier, compared with analysts' $14.83 billion projection. Same-store sales, or sales at stores open at least a year, climbed 3.7%.

Target had already warned in the quarter that it had softer-than-expected sales in September and October amid a slowdown in demand and warmer-than-average temperatures. The company said Tuesday that its earnings were hurt by soft sales in higher-margin categories such as apparel and home, which led to lower-than-expected gross margin.

The company said, however, that it hasn't "observed any meaningful change" in the intensity of the competitive environment.

Target's results stand in contrast to those from chief rival

Wal-Mart

(WMT) - Get Report

last week. Wal-Mart reported third-quarter

profit improvement and topped Wall Street estimates, crediting the boost to inventory management and price cuts.

Still, Wal-Mart, like Target, had weakness in home and apparel sales, and indicated it is weathering a tough macroeconomic climate.

Target, with its focus on more trendy fashions and goods, could take a bigger hit as its more middle-income shoppers slow down purchases. Already, middle-tier chains such as

J.C. Penney

(JCP) - Get Report

and

Kohl's

(KSS) - Get Report

have slashed their outlooks for the fourth quarter.

Still, Target said, "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."

Big Buyback, Cards Unclear

Target said it plans to launch a $10 billion share repurchase plan to take place over the next three years. The buyback, funded through debt, represents more than 20% of the retailer's shares outstanding.

The company said it expects to complete "a significant portion" of the buyback by the end of 2008, and it's not contingent on any specific outcome from the review of its credit card business.

Target announced in September that it was

mulling options for the credit card business. A sale -- which Target has previously said it wouldn't entertain -- is seen as being pushed by activist investor Bill Ackman, who recently took a stake in the retailer.

Target said Tuesday that the focus of its review remains on the economics of possible alternatives.

"At this point in the review, it is clear that

if

a transaction occurs, it would involve sharing a meaningful portion of our future pre-tax credit card contribution with a new partner," said Doug Scovanner, Target's chief financial officer, in a statement. "As a result, we are continuing to evaluate whether the benefits of a potential transaction outweigh its expected dilutive impact on earnings per share."

In the third quarter, Target's credit card revenue rose 19% to $493 million, while credit card expenses jumped 22% to $222 million. Average receivables in the quarter increased 19.6%.