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Target sees highly competitive holiday on the way

A customer is shown at a Target store

A customer is shown at a Target store in South Portland, Maine, on Nov. 28, 2014. Photo Credit: AP / Robert F. Bukaty

MINNEAPOLIS - A cautious outlook on the crucial holiday season overshadowed progress Target made in bringing more customers to its stores, pulling its shares down sharply. The shares of other retailers fell as well, even though overall economic figures show people still spending.

Target reported higher customer traffic numbers and better sales at established stores as its investments in improving its stores and online capabilities appear to be paying off. But those changes, as well as its moves to cut prices and raise employee wages, are dragging down profits.

The discount chain reported a 21 percent drop in fiscal third-quarter profit.

Seeking to soothe investors, CEO Brian Cornell said that while the fourth quarter is "always competitive," the retailer is entering the holiday period with "lots of confidence."

"While the bulk of the season is still ahead of us, we are very happy to see how these early efforts have set the tone for the season," Cornell said.

Overall U.S. retail sales rose at a solid pace last month, as people spent more at electronics, grocery, clothing and sporting goods stores. Retail sales increased 0.2 percent in October, the Commerce Department said, after a 1.9 percent gain in the previous month. The National Retail Federation trade group expects holiday sales to rise 3.6 percent to 4 percent and at least match the 3.6 percent growth of a year ago.

Target, like all traditional retailers, is in fierce competition with Amazon.com and needs to cater to the growing number of shoppers who transition seamlessly between store aisles and mobile phones when they shop.

But the company is in a stronger position than it was a year ago. Minneapolis-based Target had said in February that it would spend more than $7 billion to revamp its stores and online businesses over the next few years. Cornell says that those investments are either exceeding or meeting expectations.

Revenue at stores open at least a year rose 0.9 percent, better than analysts had predicted. It was also the second consecutive quarter that metric rose. Online sales rose 24 percent, and customer traffic was up 1.4 percent.

As part of that, Target is offering new store brands, eight of which are available for the first time this holiday season. That includes Hearth & Hand with Magnolia, a lifestyle brand from Chip and Joanna Gaines of HGTV's "Fixer Upper." Target now also has dedicated sales associates in areas like beauty and electronics.

Target is also rolling out and testing new delivery options, though it's playing catch-up. It's now shipping online orders from 1,400 of its 1,800 stores for faster delivery, and says it expects to ship more than 30 million items from its stores during the peak four weeks of the holiday season, up from 18 million last year. It's testing same-day delivery (for a fee) at four New York City stores.

Target is also testing store-curb pickup for online grocery orders at 50 stores in the Minneapolis area. In comparison, Walmart has more than 1,000 stores that offer curbside pickup for online grocery shoppers and plans to double that figure next year.

"As much as Target is making progress, we believe it needs to be bolder and more creative," Neil Saunders, managing director of GlobalData Retail, said in a report.

He noted that many legacy issues, such as a lack of stock control which leaves frequent gaps on shelves, also need to be fixed.

Target reported a third-quarter profit of $480 million, or 88 cents per share, for the period ended Oct. 28. That compares with $608 million, or $1.06 per share, a year earlier.

Earnings, adjusted for one-time items, came to 91 cents per share, or a nickel better than Wall Street had expected, according to a survey by Zacks Investment Research.

Revenue at $16.67 billion exceeded forecasts and was up from $16.4 billion in last year's third quarter.

For the quarter ending in January, Target expects earnings per share of $1.05 to $1.25, shy of Wall Street projections for $1.27. The company expects full-year earnings of $4.40 to $4.60 per share. That compares with prior guidance of $4.34 to $4.54 per share.

Shares of Target Corp. were down more than 9 percent, or $5.65 to $54.44 in Wednesday trading.

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