NEW YORK — Target Corp. beat second-quarter projections with a double-digit run-up in profits, but said slower growth could be on the second-half horizon and recent apparel trends have been soft.
Net income advanced 26.9 percent to $344 million, or 38 cents a share, from $271 million, or 30 cents, a year ago. Earnings per share beat out Wall Street’s best guess of 37 cents by a penny.
Pleased by the results, if not the longer-term outlook, investors drove up shares of the Minneapolis-based retailer $2.93, or 9.1 percent, to close Thursday at $35.10 on the New York Stock Exchange.
Total revenues for the period ended Aug. 3 fattened 12.6 percent to $10.07 billion from $8.94 billion a year ago. Retail sales amassed an 11.3 percent increase to $9.79 billion. Comparable-store sales climbed 3 percent. Credit revenues extended 89.7 percent to $277 million for the quarter as the firm continued to build the Target Visa program.
Gross margins improved 130 basis points to 32.2 percent of sales compared with a year ago. Offsetting this was a 50-basis-point increase in selling, general and administrative expenses to 23 percent of sales.Accounting for much of the quarter’s bottom-line strength, pretax profits at the flagship Target division swelled 35.6 percent to $708 million. Sales for the discount stores plumped 16.2 percent to $8.5 billion on a 4.4 percent comp increase. Mervyn’s pretax profits slid 1.7 percent to $59 million on a 4.8 percent dip in sales to $886 million and a comp drop of 5.1 percent. Marshall Field’s saw pretax income rise 12.5 percent to $18 million, as sales slid 1.5 percent to $589 million and comps decreased 2.5 percent.While pretax profits from Target’s credit card operations are included in the divisional totals, the unit’s contribution to the quarter, before the costs of financing interest expense, totaled $129 million, up 25.2 percent from a year ago. Net receivables serviced climbed 72.5 percent to $4.64 billion.Though sales in recent weeks have been soft — below plan with a 1 percent overall comp increase in July — Bob Ulrich, chairman and chief executive, on a conference call, said he was “optimistic” heading into the fall. “Most recently, the apparel categories have been softer than the rest of the business.”Target’s not alone in this softening, but Ulrich, unlike retailers who offered a variety of excuses for July’s anemic sales, played it straight: “As to why it’s been a little slower lately, I simply have no idea.”Gregg Steinhafel, president of the Target division, added: “We remain conservative in our planning, especially in light of the softer sales we’ve been experiencing in the last five weeks.”Accordingly, he said the discount stores would see gross margins expand in the third quarter and compress mildly in the fourth. Comps for the year should be up 4 percent, though somewhat lower than that during the fourth quarter.Ulrich reaffirmed Target’s desire to hold on to its Marshall Field’s and Mervyn’s divisions, despite the presence of potential buyers with ready cash. Noting that both divisions provide “a lot of synergy,” he added, “we remain committed to our Marshall Field’s division.”Ladenburg, Thalmann & Co. analyst Eric Beder noted: “It was another great quarter and they have one more coming and then comparisons get tougher. That’s when they really have to prove this concept works.”Target’s credit card ramp-up, he noted, has been driving much of the firm’s growth lately, but will stop doing so in the fourth quarter. The SuperTarget concept will not grow dramatically, he added.“The law of large numbers is eventually going to catch up with Target,” he said of the difficulty of generating substantial increases over already high numbers. After the third quarter, Beder said, “you’re going to see high-single-digit earnings growth and I don’t think that’s enough to make Wall Street excited.”During the half, profits ascended 31.2 percent to $689 million, or 76 cents a share, from $525 million, or 58 cents, a year ago. Revenues strengthened to $19.66 billion for the six months, a 13.8 percent improvement over year-ago turnover of $17.28 billion.While strength is expected to be centered on the third quarter, for the full-year, Target said it was “comfortable” with the Street’s consensus EPS estimate of $1.83. Additionally, Ulrich and chief financial officer Doug Scovanner said they would sign and file financial certifications to the Securities and Exchange Commission, in September, as required, following a review with Target’s board and audit committee. KOHL’S CORP.Kohl’s continued its torrid growth pace in the second quarter with sales and earnings that bettered expectations and comparable-store sales that exceeded 10 percent.For the three months ended Aug. 3, the Menomonee Falls, Wisc.-based mass retailer reported net income soared 43.8 percent to $124.4 million, or 36 cents a diluted share. That compares to profits of $86.5 million, or 25 cents, in the comparable period last year. Earnings per share beat Wall Street forecasts by 2 cents.Sales for the quarter grew by more than one-fourth, surging 26.8 percent to $1.92 billion from $1.52 billion a year ago. Not to be outdone, comparable-store sales gained 10.6 percent during the quarter.Inventories increased commensurate with sales, growing 25 percent to $1.54 billion from $1.17 billion last year.“All of our categories and all our regions contributed to our sales gains,” said chief executive officer Lawrence?Montgomery on a conference call with analysts. “Women’s, juniors and children’s apparel drove our higher sales, with each of those categories performing at double-digit comparable-store sales levels.”Less mature stores comped well, with units open from two to three years attaining 12 to 16 percent comp-store growth, while stores open more than five years achieved comps of 7 to 8 percent.Increases in market share and gross margins and lower selling, general and administrative costs fueled the expansion, the company said.“The sales gain was extremely strong,” said David Yamamoto of Wedbush Morgan Securities. “It was a better-than-expected quarter. We had raised our estimate twice as business has performed very well. For the second half, they are up against strong year-ago comparisons, so we expect slightly slower same-store sales gains.”Because of doubts about their inability to sustain sales and earnings growth at current levels, W.R. Hambrecht & Co. analyst Bill Dreher downgraded Kohl’s, Target and Wal-Mart to a “hold” rating from “buy,” citing macroeconomic uncertainty and eroding consumer confidence. Dreher also said he does not expect those retailers to report strong August sales despite back-to-school shopping as “consumers are increasingly making their purchases closer to the time of need.”Gross margins on the quarter increased to 38.8 percent of sales from 35.4 percent of sales, and SG&A dropped 23.2 percent to $423.7 million.