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Target, Macy's join the plunge

by Deb Weinstein
Feb 24, 2009


Target Corp. and Macy’s Inc. reported fourth-quarter earnings in synch with the downward spiral that was the trend among retailers in the second half of 2008.

Target ‘s fourth-quarter profit fell nearly 41 percent, to $609 million, or 81 cents per diluted share, in the quarter ended Jan. 31, compared with profits of $1.03 billion, or $1.23 per share, for the year-earlier period, due to what Gregg Steinhafel, chairman, president, and chief executive officer, described as “a fundamental change in consumer spending patterns.” Earnings per share beat the consensus estimate of 83 cents compiled by Bloomberg LLP.

The Minneapolis-based retailer incurred a $135 million pre-tax loss in its credit-card segment, compared with a $189 million profit for the same period in 2007.

Sales at Target for the quarter slipped 1.6 percent to $19 billion compared with $19.3 billion for the same period in the prior year. Same-store sales slipped 5.9 percent.

The stock closed at $27.83, down 60 cents, or 2.1 percent.

Cincinnati-based Macy’s announced profits plummeted 59 percent during the fourth quarter ended Jan. 31 to $310 million, or 73 cents per diluted share, compared with $750 million, or $1.73 per diluted share, for the same period a year ago.

Macy’s sales fell 8 percent to $7.9 billion compared with $8.6 billion in the prior-year quarter, and same-store sales slipped 7.0 percent.

Excluding unusual items such as costs associated with store closings, Macy's earnings per share were $1.06, missing the consensus estimate of $1.08 per diluted share compiled by Bloomberg LLP.

Macy’s stock closed at $8.29, up 89 cents, or 12 percent.

Target’s Executive Vice President, Merchandising, Kathryn A. Tesija said Target is adjusting to customers' “evolving expectations for price, quality, and convenience,” and will allot more shelf space to food, household, and baby items.

In a note JP Morgan analyst Charles Grom lowered his 2009 earnings per share estimate for Target by 50 cents, or 20 percent, to $2.00, because “management painted a gloomy outlook for the upcoming year for both its retail and credit segments.”

Grom also took little comfort in a Target statement regarding expense control. He said, “there doesn’t appear to be any ‘low hanging fruit’ left for Target to squeeze out, which is disappointing.”

Target officers on a conference call said the “pay less” part of Target’s “expect more, pay less” tagline will continue to be emphasized, so customers perceive Target’s prices as being on par with its competitors.

“We are priced within 1-2 percentage points of Wal-Mart in like or identical items in local markets,” Tesija said.
Douglas A. Scovanner, executive vice president and chief financial officer, said until there is a significant economic recovery the company projects earnings-per-share to be below last year’s levels and foresees “continued mid-single digit decline in same-store sales.”

Scovanner also said the company expects write-offs in the credit-card segment to stabilize over the next two quarters. 

 JP Morgan’s Grom, in a note, called the Macy's sales results “the best relative quarterly results among the department stores in our universe.”

Macy’s Karen Hoguet, executive vice president and chief financial officer, said in a conference call, “practical merchandise generally driven by [a] strong value proposition and affordable newness,” such as housewares, women’s suits, shoes and fashion jewelry, performed well, while discretionary luxury items like luggage and furniture lagged.

Macy’s financials were weighed down by several factors, including asset impairments related to the closing of 11 stores in January, writing down its investment in bridal business The Knot, and restructuring efforts.

Macy’s, Hoguet said, is in the process of evaluating a goodwill writedown related to its May Co. acquisition and estimates it may translate to between $10 and $12.50 per share.

The company repeated its earlier guidance of a same-store sales decline of 6 percent to 8 percent in 2009, and earnings per share excluding restructuring costs of 40 cents to 55 cents.

Grom called Macy’s guidance a “worse case scenario” and said he “remains comfortable with our 42 cent estimate.” Consensus estimate for adjusted earnings per share is 52 cents according to Bloomberg LLP.

Target’s profit for the year ended Jan. 31 fell 23 percent to 2.2 billion, or $2.86 per diluted share, compared with $2.8 billion, or $3.33 per diluted share, for the prior fiscal year.

Target’s sales for the fiscal year ended Jan. 31 were up 2.3 percent to $63 billion compared with the previous year’s sales of $61.5 billion.

Macy’s profits for the year ended Jan. 31 fell 69 percent to $280 million, or 66 cents per diluted share, compared with $893 million, or $1.97 per diluted share, in the prior year. Sales contracted 5.5 percent to $24.9 billion, compared with $26 billion.