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Target's Lower July Forecast Raises Fears

The retailer's warning of slower sales growth could signal a decline in consumer spending.

July 19, 2006|From Reuters

CHICAGO — A warning by discount retailer Target Corp. of slower-than-expected July sales growth has raised concerns that consumer spending is finally succumbing to high gasoline prices and a weakening housing market, analysts said Tuesday.

Shares of Target, the second-largest U.S. discount chain, fell the most in eight months after the company cut its forecast late Monday for July same-store sales.

Target said sales this month would rise 3% to 4% after previously forecasting that sales at stores open at least a year would rise 4% to 6%.

Minneapolis-based Target's stock fell $2.02, or 4.3%, to $45.53 on Tuesday, its biggest drop since November.

"We believe the weakening housing market and prospects of high oil and gasoline prices, along with other negatives, will during the next few quarters pressure same-store sales for Target and other retailers," A.G. Edwards analyst Robert Buchanan wrote in a note to clients.

A.G. Edwards also downgraded J.C. Penney Co., Abercrombie & Fitch Co. and Best Buy Co. to "hold" from "buy" because of concerns over slower spending, sending shares of all three companies lower.

Penney dropped 3.5%, Abercrombie lost 4.8% and Best Buy fell 3.8%. The Standard & Poor's retailing index was off 2%.

Consumer spending accounts for about two-thirds of U.S. economic activity, so Wall Street has been watching closely for any signs of a slowdown. Spending proved resilient through last summer's oil price spike, but analysts have noted some recent signs of a pullback.

The average price paid by U.S. consumers for a gallon of regular gasoline jumped 2 cents last week to $2.99, the highest since Hurricane Katrina disrupted petroleum supplies in September, the government said Monday.

Rising interest rates also have pinched consumers and slowed the cash-out mortgage refinancing boom that had swelled household budgets in previous years.

June same-store sales were slightly weaker than expected for the retail sector, which prompted concerns that consumers might be wavering.

Target, second to Wal-Mart Stores Inc. in the U.S. discount segment, this month had reported slightly better-than-expected June sales and had said second-quarter earnings would probably meet or exceed expectations.

The retailer made no comment about its profit forecast in its sales update.

Many analysts have been bullish on Target, noting that it caters to wealthier shoppers who are less sensitive to rising energy costs. Target's sales growth has outpaced Wal-Mart's in recent months.

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