Target Gets Q1 Profit Boost as Consumers Spend on Non-Essentials

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Minneapolis–Target Corp. reported Wednesday that its first-quarter profit rose 29% beating Wall Street expectations an indicating that consumers are spending again on non-essential items including apparel and accessories. An 188% increase in the company’s credit card unit’s profit also boosted results.

Net income rose to $671 million, or 90 cents a share, in the three months ended May 1, from $522 million, or 69 cents, a year earlier. In its statement about the earnings, Target pointed out that first quarter earnings per share from continuing businesses is the highest in its history (excluding fourth quarter results).

Comp Store Outperforms Wal-Mart

Sales rose 5.5% to $15.16 billion. Credit-card revenue declined 7.9% to $435 million as average receivables fell, putting total revenue at $15.59 billion, the 1,740-store chain said. Most market analysts had estimated Target would earn an aveverate of 86 cents a share on sales of $15.5 million, FactSet Research reported.

Comparable-store sales rose 2.8%, a reversal from the year-earlier decline. The number of transactions and average spending per receipt increased even though average selling price per unit declined slightly.

In comparison, Target’s larger competitior Walmart said Tuesday its comparable sales in its U.S. stores fell 1.4%, missing analysts’ estimates, after customer traffic declined. The retail giant also gave a second quarter outlook that may miss analysts’ estimates as it cited “continuing challenging sales environment.”

“I expect Target to display faster earnings growth and for the stock to outperform Wal-Mart,” says analyst Brian Sozzi of Wall Street Strategies. “Walmart is losing the share it won during the recession and simply as a result of its size will not grow earnings in line with, or above that, of Target medium-term.”

Target’s operating profit in the retail unit climbed 15% to $1.11 billion, with credit-card segment profit nearly tripling to $111 million from $39 million a year ago after bad debt expenses fell 33%.

Better Margins

“Our retail segment delivered results well above our expectations, as sales of higher-margin discretionary items were particularly strong, especially in apparel,” says Gregg Steinhafel, the store’s ceo. “Profitability in our credit-card segment was also well above expectations, as declining risk levels led to a sharp reduction in bad debt expense compared with a year ago.”

First-quarter gross margin widened to 31.3% from 30.8%, as selling, general and administrative expenses fell to 20.6% of sales from 20.9%.

Designer Brands Pay Off?

Market analysts too see Target’s popularly-priced designer collections from the likes of Zac Posen and Jean Paul Gaultier, as benefiting from the improved economy where shoppers are starting to spend beyond groceries and other consumables. Yet Steinhafel has been working to drive traffic to the store’s food products in the P-fresh section of some Target stores.

“We believe many of Target’s merchandising initiatives, especially in apparel, are starting to drive an improvement,” says Lazard Capital Markets analyst Todd Slater.

To better compete with Walmart , Target’s also increased emphasis in its marketing to remove consumers’ perception that its products cost more than similar items at Walmart.

The company also has said its growth plan includes developing smaller stores in urban markets, while researching opening locations in Canada, Mexico or the rest of Latin America.

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