Earnings Preview: Target Corp.

Discount retailer Target Corp. reports earnings for the third quarter on Monday. The following is a summary of key developments and analyst opinion related to the period.

OVERVIEW: Target Corp. is facing challenging times as it struggles with slower sales and rising delinquencies in its credit card business that have eroded profits.

While discounters, particularly Wal-Mart Stores Inc., have benefited from consumers switching to cheaper stores, Target has struggled. With more than 40 percent of its revenue coming from nonessential such as funky jeans and quilts, Target's cheap chic formula — once its strength — has also become an Achilles heel as shoppers fixate on the lowest prices.

Target is also tightening its credit card terms to protect profits and told investors last month that it may become even more stringent if credit conditions keep deteriorating. The company sold 47 percent of its credit card receivables to JPMorgan Chase in May.

Such problems, Target said last month, are increasing the likelihood that its third-quarter earnings result may fall below Wall Street estimates. Last week, Target reported a 4.8 percent decline in same-store sales, or sales at stores opened at least a year, for October. Analysts surveyed by Thomson Reuters, on average, expected a 2.8 percent decline.

One of the top priorities at Target is emphasizing the "pay less" part of its "Expect More, Pay Less" slogan; the retailer said it will focus on price in its holiday advertising. Meanwhile, in an effort to fuel customer traffic, the company is testing in Minneapolis a new concept that's a hybrid between its regular and Super Target stores. The general merchandise store will offer pre-packaged perishable food such as bagged lettuce.

BY THE NUMBERS: Last month, Target said its third-quarter earnings may be below Wall Street's estimate at the time of 52 cents. It also noted then that it expects 2008 full-year earnings to meet or exceed last year's $3.33 per share. Analysts surveyed by Thomson Reuters now expects 49 cents per share for the third quarter and $3.27 per share for the year.

ANALYST TAKE: Citigroup analyst Deborah Weinswig said in a note last week that she's increasingly concerned that profit margins are being pressured because people are buying more low-margin items such as food and consumables. She also believes Target is "losing focus" in women's apparel, which represents more than 10 percent of total sales. And she said she's concerned about the credit card business putting overall earnings growth at risk.

WHAT'S AHEAD: Analysts will want an update on the company's profit and sales outlook for the fourth quarter and beyond. They'll also want to know details about its credit card business and how cautious it is about buying spring and fall 2009 inventories.

STOCK PERFORMANCE: Target shares fell 10 percent during the quarter and have dropped 43 percent over the past 52 weeks. Shares are trading at around $33, the low end of their 52-week range of $30.45 to $61.

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