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NEW YORK — Sometimes solid sales and earnings growth are no match for high expectations.

This story first appeared in the August 18, 2003 issue of WWD.  Subscribe Today.

Target Corp. learned that the hard way Thursday when its shares continued to tumble after the company said second-quarter profits just missed analysts’ expectations. In a huge surge of trading where average volume more than tripled, Target’s stock fell 5.6 percent, or $2.24, to settle at $37.70 on the New York Stock Exchange. On Friday, Target shares regained a fraction of that, moving up 19 cents, or 0.5 percent, to close at $37.89, but that was still well below the 52-week high of $40.33 it hit in trading on Wednesday.

For the three months ended Aug. 2, the Minneapolis-based discount giant said net income rose 4.1 percent to $358 million, or 39 cents a diluted share, coming up 1 cent short of the Wall Street consensus estimate. Last month Target had forecast second-quarter EPS of 39 to 40 cents. By comparison, in the year-ago quarter America’s second-largest discounter after Wal-Mart Stores had profits of $344 million, or 38 cents.

Total revenues for the period climbed 9.1 percent to $11 billion from $10.1 billion a year ago. Consolidated sales from the three retail operations comprised of Target stores, Mervyn’s and Marshall Field’s increased 8.7 percent to $10.64 billion from $9.79 billion. Net credit card revenues managed an especially impressive performance on the strength of the Target Visa card, shooting up nearly a quarter, or 23.5 percent, to $342 million from $277 million last year, but that represented just 3.1 percent of the revenue total.

“So far this year the top line of our profit-and-loss statement has grown somewhat faster than the bottom line,” said chief financial officer Douglas Scovanner on a conference call with analysts. “At our Target stores division, we have successfully cycled the exceptional performance we enjoyed in the first six months of last year when we delivered a 35 percent increase in segment profits on the strength of a 5.6 percent increase in year-to-date same store sales. Looking forward, we will benefit from much easier top-line comparisons in the second half of this year because the performance last year began to soften in July.”

In addition to difficult year-ago comparisons, Target’s bottom line lagged behind sales due to this season’s retail markdown pressure, as well as higher expenses. Company-wide gross margins contracted 26 basis points.

Eroding the bottom line was greater consolidated selling, general and administrative costs, which expanded 20 basis points to 23.2 percent of sales. Target said a lack of sales leverage at all three division was to blame, mostly due to higher wages and benefits costs.

All of which was seemingly not enough for analysts or investors.

“Weak sales growth restrained second-quarter profits gains,” wrote Goldman Sachs analysts in a research note. “All three operating divisions at Target experienced an increase in second-quarter expense pressure related to weak comp-store sales. Earnings grew just 5.7 percent at the core Target division, much of that reflecting a 24 percent increase in credit’s contribution to corporate pretax earnings.”

Considering the three divisions in greater detail, Target stores’ 5.7 percent operating profit increase amounted to $749 million on an 11.3 percent jump in sales to $9.46 billion. Store-for-store sales comped up 2.7 percent. Mervyn’s operating earnings plunged by almost half, or 47.5 percent, to $31 million, as sales fell 7.3 percent to $821 million and comps sunk 7.9 percent. Marshall Field’s also partially offset results at Target, as operating income decreased 27.8 percent to $13 million on a 3.4 percent sales drop to $569 million. Comps fell 2.4 percent.

Overall, for the first half of the year, Target said net earnings increased 2.6 percent to $707 million, or 77 cents a diluted share. That compares with year-ago earnings of $689 million, or 75 cents. Total revenues rose 8.4 percent to $21.31 billion from $19.66 billion a year ago and consolidated comps increased fractionally, or 0.7 percent. Target stores more than offset continued weakness at Mervyn’s and Marshall Field’s, producing an operating profit gain of 7 percent to $1.48 billion on sales of $18.28 billion, a 10.6 percent improvement over last year, while same-store sales grew 1.9 percent.