By and and  on August 19, 2009

Target Corp.’s second-quarter earnings handily beat analysts’ estimates Tuesday despite a 6.4 percent decline and apparel and home businesses that are lagging behind the rest of the company.

The TJX Cos. Inc. also passed analysts’ estimates, but did so in a manner seldom seen these days — with a 30.6 percent rise in profitability and increases in both net and same-store sales.

At Target, net income for the three months ended Aug. 1 fell to $594 million, or 79 cents a diluted share, from $634 million, or 82 cents, in the second quarter of 2008. The consensus estimate was for earnings per share of 66 cents. Sales declined 2.7 percent, to $14.57 billion from $14.97 billion, and were down 6.2 percent on a comparable-store basis.

During a morning conference call, Kathryn A. Tesija, executive vice president of merchandising, said sales in the “more discretionary” areas of apparel and home were softer than the rest of the store, with comps declining in the high-single to low-double digits. Activewear and infant and toddler apparel performed best, but women’s apparel and shoes saw “particular softness.”

Tesija said Target’s commitment to exclusive products is evident in partnerships such as Anna Sheffield’s sterling silver jewelry collection; Jaye Hersh’s Intuition for Target, now in stores; Anna Sui’s Designer Collaboration, bowing in September, and Carlos Falchi’s handbag collection, launching in November.

Citing the stronger-than-expected results for the quarter, the Minneapolis-based retailer put a positive spin on the results. Target’s retail business generated stronger gross margins — 31.9 percent of sales versus 31.2 percent a year ago — and the credit card operation was profitable in the second quarter.

Target narrowed its comp-store sales gap with Wal-Mart Stores Inc. by more than 2 percentage points, Gregg Steinhafel, chairman, president and chief executive officer, said on the conference call.

However, Target’s top line continues to suffer from weak traffic and lower transaction sizes, with apparel and home the retailer’s biggest challenges. Consumers continue to equate competitors such as Wal-Mart with lower prices. “We’re not satisfied with the retail sales results, but we’re pleased with the resiliency of our business model in this environment and how our teams are managing the business,” Steinhafel said.

Target rolled out a “Low Price Promise” campaign last month that “explicitly explains that Target is now matching competitive advertised specials in local markets,” Steinhafel said. “The perception is that our value proposition may not be as strong as some competitors. Our research shows that we’re starting to move the needle slightly.” In the 30 days since LPP bowed, there have been relatively few adjustments made at the store level. “We’re seeing that our prices are right,” Steinhafel said.

About half the quarter’s 70 basis point improvement in gross margin came from lower transportation costs, Steinhafel said. “We’re also beginning to experience cost reductions on a variety of products. As we move to the fall, improvements may moderate due to sharper pricing.”

Selling, general and administrative expenses declined 0.6 percent, to $3.14 billion, in the quarter in spite of the addition of 71 stores. The retailer will open 75 stores this year and expects to open 12 units in 2010. “We continue to generate in excess of $4 billion cash flow from operations and expect to reinvest $2 billion in our retail business,” Steinhafel said. “We’re on track to retire our debt maturities this year with internally generated cash flow. We would only approach the term debt markets this year if some unique opportunity were to present itself.”

Year-to-date net income fell 9.8 percent to $1.12 billion, or $1.48 a diluted share, as sales dropped 1.2 percent to $28.93 billion. The company now expects full-year EPS of $2.97, assuming second-half EPS of $1.49.

Shares of Target rose $3.11, or 7.6 percent, to close at $44.32 following Tuesday morning’s earnings news.

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