By  on November 17, 2008

Target Corp.’s third-quarter profits fell by 23.8 percent, but the company said it is still picking up market share in apparel despite declining sales in the category.

Bowing to the realities of the weakest consumer market in a generation, the discounter cut its capital expenditure plans next year by $1 billion, slowing store expansion, and hit the pause button on its share buyback program. The Minneapolis-based firm’s credit card division turned in significantly lower profits, due in part to higher expenses for bad debt as cardholders struggle to meet their financial obligations.

Still, Gregg Steinhafel, president and chief executive officer, said Target remains positioned to take advantage of the slowdown and come out stronger.

“As the environment continues to deteriorate and consumer spending, especially in the discretionary category, continues to contract, we are adjusting tactics to ensure that Target remains the price leader in the market and aggressively pursues market share gain opportunities,” Steinhafel said on a conference call with Wall Street analysts.

“With a strong emphasis on delivering exceptional value, we believe that Target, Wal-Mart [Stores Inc.] and Costco [Wholesale Corp.] will be the big winners this holiday season,” Steinhafel said. “Some of our other retail competitors may not emerge intact from the current economic turmoil. While we do not celebrate the misfortune of others in our industry, we believe that our smaller competitive sets would be to our benefit when the economy improves.”

Profits for the quarter ended Nov. 1 fell to $369 million, or 49 cents a diluted share, from $483 million, or 56 cents, a year ago. Total revenues, including the retail and credit card divisions, inched up 1.9 percent to $15.11 billion from $14.84 billion.

The company’s shares fell $1.35, or 4.1 percent, in New York Stock Exchange trading Monday.

Target’s largest and fiercest competitor, Wal-Mart, last week bucked the recent retail trend, pushing sales and earnings up for the quarter.

At Target’s 1,684 stores, earnings before interest and taxes rose 7.9 percent to $772 million on a 1.7 percent increase in sales to $14.59 billion. Comparable-stores sales fell 3.3 percent.

Total sales of food, health and beauty products increased about 10 percent for the quarter, while sales of apparel and home products fell by a percentage in the low- to midsingle-digit range, added Doug Scovanner, executive vice president and chief financial officer, on the call.

“Clearly, as bad as that sounds, that is a pace that is considerably better than the U.S. market, as we see estimates for the U.S. market,” Scovanner said. “And so, we continue to gain share in those categories.”

Segment profitability at the firm’s credit card division fell 83 percent to $35 million, due to higher bad-debt expense, decreased interest rates and the company’s sale of almost half the business to J.P. Morgan Chase & Co. in June.

To preserve cash, Target reduced planned capital expenditures next year to about $3 billion instead of $4 billion. A substantial portion of the change comes from reduced spending for stores that would have opened in 2010 and beyond.

“We see this as a positive step while awaiting a bottom in the commercial real estate market, conserving cash and enhancing returns on capital in an uncertain environment,” Todd Slater, equity analyst at Lazard Capital Markets, said in a research note.

Even so, the company might snatch up a chunk of real estate that becomes available, perhaps from store closures. “Let me be crystal clear,” Scovanner told analysts. “If a block of stores came along better priced that allowed us to enjoy robust returns, we would pursue that block of stores.”

Scovanner also said the company was continuing to evaluate the proposal from activist investor William Ackman to spin off the land under Target’s stores into what would become the largest real estate investment trust in the country.

In the first nine months of the year, Target’s earnings have fallen 11.9 percent to $1.61 billion, or $2.06 a diluted share, from $1.82 billion, or $2.11, a year earlier. Revenues rose 4.4 percent to $45.39 billion from $43.5 billion.

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