News Column

Target Raises Profit Outlook on Solid 2Q Sales

August 16, 2012

Julie Forster


A Canadian expansion put a kink in Target Corp.'s earnings, keeping second-quarter profits flat. But the retailer raised its forecast, driving shares to a 52-week high Wednesday.

Target upped its profit estimates for the full-year to $4.20 to $4.40 per share, which includes a 50-cent-per-share impact on earnings from the Canadian expenses.

Shares closed up 1.7 percent Wednesday, Aug. 15, to $64.50. The shares hit $64.99 during the day.

Target is on pace to open stores in Canada next spring. But for now, the startup expenses are affecting the bottom line.

Net income for the company in the quarter was $704 million, the same as last year. The Minneapolis-based retailer is paying to remodel stores and build infrastructure for its entry into the Canadian market. Plans are to open 125 stores in Canada in 2013.

Total revenue grew 3.3 percent to $16.7 billion in an environment in which shoppers remain cautious in their spending. Sales at stores open more than a year grew 3.1 percent. Purchases of less discretionary items such as food, health and beauty led the way.

Discounting and a growing number of sales from the food aisle affected the retailer's gross margins, which declined to 31.3 percent from 31.6 percent in the same period a year ago.

"The markup on food is lower than the markup on general merchandise overall and so it results in a lower gross margin for them," said Glenn Johnson, a portfolio manager for Mairs and Power, a St. Paul investment

firm that holds 1.7 million shares of Target, its second largest holding.

The discount retailer continues to convert more of its stores to sell a wider assortment of food -- one category that has been growing faster than overall sales for more than a decade.

"By the end of the year, more than 1,100 of our general merchandise stores will reflect an expanded food offering combined with other merchandise reinventions," said Gregg Steinhafel, Target's chief executive officer. The company has 1,772 stores across the U.S.

Sales of food and health and beauty products have been growing faster than other categories.

"They've become even more important in an economy where budget conscious consumers are more consistently focused on needs than wants," Kathee Tesija, executive vice president of merchandising, told analysts on a conference call Wednesday.

Target's 5 percent-off credit and debit cards, called Redcard rewards, also are helping drive shoppers into the stores. Overall, Target shoppers made more transactions and the size of the transactions grew during the period. The share of purchases made with the 5 percent-off card has been consistently growing, too, as consumers receive that discount on virtually every purchase.

That has an impact on sales.

"Basically, you're getting 95 percent of the sales you used to be getting before, but you still have all the same costs of delivering those goods to the consumer," said Sean Naughton, a senior research analyst for Piper Jaffray. The retailer is banking that the discount will fuel a higher number of transactions and an increased share of the wallet, he said.

That seems to be working. "They're marketing the card a little bit more aggressively in the store than they have in the past," Naughton said.

Source: (c) 2012 the Pioneer Press (St. Paul, Minn.) Distributed by MCT Information Services

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