Consumer spending pullback hurts Target earnings; retailer cuts holiday forecast

Target Corp. posted disappointing earnings results for the third quarter and cut its forecast for the holidays, citing continued weakness in consumer shopping habits. Shares of Target are off by more than 10% in premarket trading.

"In the latter weeks of the quarter, sales and profit trends softened meaningfully, with guests’ shopping behavior increasingly impacted by inflation, rising interest rates and economic uncertainty," said Brian Cornell in a statement. “This resulted in a third-quarter profit performance well below our expectations.”

For the quarter, Target posted earnings of $1.54, down 49.3 percent from $3.04 from the same period a year ago and far below the average analyst estimate of $2.13 per share. Sales rose 3.4% to $26.5 billion; comparable sales rose 2.7%.

Executives pointed to the recent slowdown in spending as they cut their forecast for the crucial holiday quarter; Target now expects a low-single digit decline in comparable sales.

The Minneapolis-based retailer said it plans to cut costs by $2 billion, though mass layoffs aren't part of the plan, according to Chief Financial Officer Michael Fiddelke.

RELATED: Read Target's full earnings announcement

Target said that it had marked gains in the five major merchandise categories and had managed to unload much of the unwanted merchandise that had been a problem earlier this year. But doing so hurt profit margins (24.7% in the quarter vs. 28% a year ago) while SG&A expense rates rose to 19.7%, from 18.9% in the year-ago quarter.)

Investors had clearly hoped for better. MarketWatch reports that Target's stock rose 3.4% yesterday following a strong earnings performance from Bentonville, Ark.-based Walmart Inc., which saw U.S. comparable sales rise by more than 8.2% in the just-completed quarter.

But despite their positions as the nation's No. 1 and No. 2 mass-market retail chains, Walmart and Target have some big differences. Walmart is also the nation's largest grocer and gets more than half of its revenue from food, which is a more resistant segment to consumer pullbacks than, say, the home goods and apparel that Target relies on for sales growth. (Target also has a grocery segment, but it's nowhere near as big as Walmart's.)

John Zolidis, founder and president of Quo Vadis Capital Inc., compared the disappointing results to 2008, when the economy was weakening and Target was losing ground against Walmart (for similar product mix reasons as this week).

"We had expected that Target was better positioned for consumer weakness this time around, due to its improved competitive position and upgraded capabilities," Zolidis wrote in an investors note Wednesday. "But, it certainly does not feel that way, looking at this year's performance."