Home category results punish Target    

Minneapolis – The sluggish performance in home and apparel were entirely to blame for Target Corp.’s gross margin rate drop in the third quarter, the 1,591-unit retailer said during its earnings webcast call today – and Target shoppers are avoiding collection-level home textiles in favor of bedding basics.

“Apparel and home represented a lower portion of our sales this year than last year,” said Douglas Scovanner, evp and cfo. “Slower growth in those categories was responsible for all for the decline in gross margin rate.”

Target reported third-quarter net earnings of $483 million, down 4.5% from $506 million in the year-ago period. Gross margin rate as a percentage of sales dropped off 40 basis points to 34.1%.

Sales climbed 9.3% to $14.8 billion, with comps cruising up 3.7%.

Home specifically had been performing “pretty well” for Target until the third quarter, when “it softened up a bit” – a trend the retailer sees persisting into the new year, said Gregg Steinhafel, president.

“We expect that to remain somewhat soft until some of the housing issues go away or at least diminish in terms of magnitude,” he added. That means at least into the fourth quarter and likely into the second quarter of 2008, Steinhafel said, “We expect the soft sales environment to continue and that the discretionary categories like apparel and home will be under more pressure than the hard lines and food categories.”

Apparel has already been aided by normalizing weather conditions and a consumers’ willingness to trade up, Steinhafel said. The same dynamics are true in hand lines and food.

But home has seen instead a “trade-down,” Steinhafel said, citing as an example stronger selling lately for basic bedding vs. “collection bedding” programs. “More of the trade-down is happening in the home, but the balance of the business, we don’t see any trade-down whatsoever,” he said.

Target.com, which had been having a “very good year” so far, was another area that slowed during the third quarter as “our sales rates of increase have moderated somewhat compared to very robust increases we were seeing in the early parts of the year,” Steinhafel said.

The company also authorized a new $10 billion share repurchase program, replacing the previous authorization.

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