Discount Stores Report Higher Profits

Retailer Target Corp. posted higher third-quarter profit as sales at its flagship discount chain thrived in the weak U.S. economy, but mall-based clothing chains Limited Inc. and Intimate Brands reported losses as falling consumer confidence took its toll.

In recent quarters, discount chains and others offering lower prices have fared better than department stores and apparel chains. After the Sept. 11 attacks, consumer confidence took another jolt and the number of shoppers in malls fell, worsening an already weak retail environment.

For the critical fourth quarter, Target said it backed analysts’ consensus earnings estimate of 65 cents a share. Limited and Intimate Brands, parent of Victoria’s Secret lingerie chain, said they would meet Wall Street forecasts.

Holiday purchases typically account for 25% of a retailer’s annual sales. U.S. households are expected to spend an average $462 on gifts during the holidays, down from $490 last year, according to a survey by the Conference Board.

Minneapolis, Minn.-based Target, which also operates Mervyn’s and Marshall Field’s department stores, said third-quarter earnings before special items rose 5% to $226 million, or 25 cents a diluted share, from $216 million, or 24 cents a share, a year earlier.

Including a pretax charge of $67 million for an accounting change, third-quarter net income was $185 million, or 20 cents a share.

Revenue increased 9% to $9.35 billion, driven by a 13% rise at Target stores. Sales at stores open at least a year--a key measure of retail performance--were up 1.5%.

Pretax profit at the company’s Target division rose 15% to $444 million. But Ladenburg, Thalmann & Co. retail analyst Eric Beder cautioned that earnings growth at Target will be kept in check as general merchandise chains ring up more sales of basics such as food.

“The top line is getting better, but the margins are not,” he said. Target said that for the third quarter ended Nov. 3, gross profit margins fell to 30.5% from 30.6% a year earlier, pinched by increased dependence on sales from its Target division, which has the lowest margins of the group’s units.

BJ’s Wholesale Club Inc., which sells bulk merchandise at deep discounts, also had higher earnings before charges in the period ended Nov. 3. The Natick, Mass.-based retailer said earnings rose 7.8% from a year earlier to $29.5 million, or 40 cents a share. Sales rose 7.5% to $1.2 billion.

Including an after-tax charge of $63 million, or 87 cents a share, to cover lease liabilities resulting from the bankruptcy of home goods chain House2Home Inc., BJ’s net loss was $33.5 million, or 46 cents a share.

Columbus, Ohio-based Limited reported a loss of $11.8 million, or 3 cents a share, for the three months ended Nov. 3, compared with a year-earlier profit of $49.2 million, or 11 cents a share.

The company said the latest results exclude an after-tax gain of $102 million resulting from the sale of its Lane Bryant plus-size women’s apparel unit to Charming Shoppes Inc. in August. Sales fell 12% to $1.9 billion.

Intimate Brands, which is 84%-owned by Limited, said its third-quarter net loss was $10.7 million, or 2 cents a share, compared with a year-earlier profit of $43.2 million, or 9 cents a share.

The retailer, which also runs the Bath & Body Works chain, said sales fell 4% to $905.6 million, while sales at stores open at least a year were down 10%.

In stark contrast, women’s apparel chain Talbots Inc. and off-price retailer Ross Stores Inc. reported higher third-quarter profits.

Talbots said its fiscal third-quarter profit rose 5% as inventory and cost controls helped offset a sales shortfall caused partly by the Sept. 11 attacks and the weak U.S. economy. Net income in the quarter ended Nov. 3, rose to $36.6 million, or 58 cents a diluted share, from $34.9 million, or 54 cents a share, a year earlier.

Hingham, Mass.-based Talbots said third-quarter sales fell 1% to $393.9 million, while sales at stores open at least a year fell 8.2%.

Newark, Calif.-based Ross Stores posted an 18% increase in fiscal third-quarter profit, driven in part by strong back-to-school and home-goods sales. Net income for the quarter ended Nov. 3 rose to $35 million, or 43 cents a share, from $29.7 million, or 36 cents, a year ago. Total sales rose 15% to $739 million, while sales at stores open at least a year increased 5%.