Breaking up isn't that hard to do after all — according to Target Corp.
As the Minneapolis-based discounter posted an 8.2 percent drop in fourth-quarter profits Tuesday and conceded it would be a "challenging" first half, the company said it could do fine without Isaac Mizrahi.
Target's fourth-quarter earnings fell to $1.03 billion, or $1.23 a diluted share, from $1.12 billion, or $1.29, a year earlier. The results beat analysts' expectations by a penny. Gross margins were hurt by price promotions to move goods once sales shaped up to be slower than anticipated. Total revenues for the quarter ended Feb. 2 inched up 0.8 percent to $19.87 billion, versus $19.71 billion a year earlier.
Included in that was a 20.7 percent jump in credit card revenues to $532 million. The firm said it expects its credit operations, which are under strategic review and might be sold off, to continue to add to profits, before taxes, despite the general fallout of the credit markets.
On the fashion front, Target said Mizrahi's cheap-chic offerings will be replaced with fashions by emerging international names.
Analysts have seen Mizrahi's pending departure to take over the Liz Claiborne brand as a significant loss for Target, but president Gregg Steinhafel said the brand makes up only about 3 percent of its apparel and accessories business. Industry sources said the Mizrahi brand brought in about $125 million for Target.
"We really view his strength as a niche contemporary collection and any effort that we have had to move beyond that were unsuccessful," said Steinhafel.
After five years in which the designer not only put together collections for the store, but helped spruce up its fashion image, Mizrahi's contract expires this year.
"We took this as an opportunity to move beyond this partnership," said Steinhafel, who will replace Robert Ulrich as chief executive officer in May, on a conference call. "We did not want to pass on higher royalty rates to a small collection business within the store."
Steinhafel said the company could easily replace the four of five racks currently occupied by Mizrahi in Target's apparel department. "We [have] a terrific portfolio of new emerging designers coming on stream this year," he said.
Through its Go International program, Target has, for a time, sold looks from Behnaz Sarafpour, Proenza Schouler and Erin Fetherston.
Given sinking consumer confidence and the looming possibility of a recession, any new names entering the store might well get a trial by fire.
For the full year, Target's earnings rose 2.2 percent to $2.85 billion, or $3.33 a diluted share, on a 6.5 percent increase in revenues to $63.37 billion.
Target expects its comparable-stores sales to rise by 2 percent to 3 percent in 2008, with hopes for strength in the second half offsetting what seems to be a tough first half. Target said Wall Street's estimates, calling for earnings per share of 73 cents in the first quarter and $3.56 for the full year, were reasonable.
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