Target 3Q Profit Slips, Misses Estimates

Target also said its board has authorized a new $10 billion share buyback program that at current prices would cover 20 percent of its outstanding shares. Target said the buyback would be funded partially by additional debt.

Target shares fell $2.21, or 4.1 percent, to $51.69 Tuesday after trading at a 52-week low of $50.25 earlier in the session.

Third-quarter earnings fell to $483 million, or 56 cents per share, from $506 million, or 59 cents per share, in the prior year.

Quarterly sales grew 9 percent to $14.84 billion, from $13.57 billion in the third quarter of 2006.

Analysts surveyed by Thomson Financial forecast earnings of 62 cents per share on revenue of $14.83 billion. The earnings estimates typically exclude one-time items.

"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," said Chairman and Chief Executive Bob Ulrich.

Quarterly same-store sales increased 3.7 percent. Same-store sales, or sales at stores open at least a year, is a key indicator of retailer performance since it measures growth at existing stores rather than newly opened ones.

Chief Financial Officer Doug Scovanner said on a conference call that increases in fourth-quarter same-store sales would be in the 3 percent to 5 percent range.

Scovanner said profits would be better than the third quarter, but warned that earnings-per-share growth "will likely be quite modest compared to last year's result," when EPS jumped almost 22 percent.

"Retail margins drove the miss," Morgan Stanley analyst Gregory Melich wrote in a note. He said Target's gross margins dropped a half a percentage point from a year ago because of weak sales of apparel and home goods.

Target said it expects to complete "a significant portion" of the new share repurchase by the end of 2008. Despite using debt to fund some of the repurchase, Ulrich said the buyback would still allow Target to "maintain our strong investment-grade debt ratings within a prudent range while allowing for substantial value to be returned to our shareholders."

Fitch Ratings downgraded $11.2 billion of Target's long-term debt by one notch, and said it expects Target to use debt for the majority of the repurchase.

"Although Fitch views Target's financial strategy as more aggressive, the company's steady revenue growth and operating profit margins provide adequate capacity for Target to increase the amount of debt in its capital structure without significantly weakening its credit profile," Fitch wrote in announcing the action.

Target seemed to rule out selling its credit-card operations, which it expects to contribute $600 million to full-year earnings. It has been considering what to do about its credit card receivables since September.

On Tuesday, Chief Financial Officer Doug Scovanner said: "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." Either way, though, he said "we remain committed to maintaining our core financial services operation."

The company said a final decision would be made by the end of next month.

For the first nine months of the year, Target earned $1.82 billion, or 2.11 per share, up 9 percent from $1.67 billion, or $1.92 per share, during the same period last year. Revenue rose 9.3 percent to $43.5 billion, from $39.78 billion a year ago.

Target Corp.: