NEW YORK — Target Corp. Thursday said its second-quarter profits increased nearly 13 percent, largely due to higher food sales and revenue from its credit card business.
Net earnings in the quarter ended July 29 rose to $609 million, or 70 cents per share, compared with $540 million, or 61 cents per share, in the second quarter last year. Wall Street analysts' average forecast was 69 cents a share.
Total revenues in the quarter increased 11.3 percent, to $13.3 billion from $11.9 billion in the same period in 2005, driven by new store expansion and credit card operations. Same-store sales in the second quarter rose 4.6 percent. Sales for the period rose 11.1 percent, to $12.96 billion from $11.67 billion a year ago.
On a conference call with analysts, Target's chairman and chief executive officer, Bob Ulrich, said he was confident the Minneapolis retailer could sustain strong growth in spite of worrisome signs in the economy.
"We continue to believe Target will deliver strong sales and profit performance in 2006 and generate another year of profitable market share growth even in light of the challenges posed by the current economic environment," said Ulrich.
"For more than 10 years, we have executed successfully this approach by anticipating shifts in guest preferences, refining our merchandising and marketing to adapt to various economic challenges, and overcoming competitive threats to produce strong sales and earnings growth," he added. "Though the current marketplace continues to be highly competitive and the macroeconomic environment, in the near term, appears uncertain, we are confident that...we can translate our core strategy and brand promise into continued profitable market share growth."
The retailer considers Wall Street's average profit projection of $3.11 per share for the year to be reasonable.
Ulrich said the company is on track to open its 2,000th Target in the U.S. in 2011, when it will also hit the $100 billion annual sales mark.
To achieve those goals, the retailer will have to compete with an increasingly trend-conscious Wal-Mart, which has shown its willingness to attack Target's strength in apparel and design. Wal-Mart is remodeling stores and introducing new brands, such as Metro 7, for fashion-conscious women.In fact, the specter of Wal-Mart wasn't far from the minds of Target executives during the call. "Even as some of our competitors test new merchandise brands and upgrade merchandise quality and focus on marketing, we are growing our own brands, aggressively increasing content, improving our supply chain and speed to market, and delivering an exciting shopping experience," said Gregg Steinhafel, president. "We continue to differentiate ourselves through our own brands."
Go International capsule collections have been designed by Luella Bartley and Tara Jarmon and now include Paul & Joe, designed by Sophie Albou. "The [Go International] collection, though not an important driver of sales volume, is an exciting addition to our fall offering for juniors," Steinhafel said.
Target hopes to drive sales with a new "high-quality, wear-to-work suiting collection" called Merona, bowing in September, Steinhafel said. "Merona will cater to body types and personal tastes and offer incredible flexibility for guests to mix and match jackets with pants and skirts.
"We're refining our assortment and reinventing entire categories throughout the store," he added. "We've updated our approach to the dollar-store shopping concept. We're introducing better-quality products priced at two for $5, in addition to the $1 offerings. We've reinvented apparel and hosiery. We've introduced improvements in fit, fabric, design and fabrication in apparel, sleepwear and hosiery."
Asked by an analyst whether Target has any leeway in hiking unit prices as it educates consumers on product benefits, Steinhafel said, "We believe that over the long term we absolutely have an opportunity to increase the price per item. We can increase our retail price in any part of the store. In ready-to-wear, accessories and intimates, we've seen higher prices."
Yet as bright as prospects are in health and beauty aids, apparel, accessories and electronics, Target continues to have trouble with prerecorded music and videos, home furnishings such as bedding and rugs, and decorative accessories, where sales continued to be somewhat disappointing in the quarter.
Target remains committed to its "expect more, pay less" strategy, but may tweak the message if consumer spending begins to slow down. "During a tougher macroeconomic environment, we'll focus slightly more on the ‘pay less' part of the equation and make sure our content and marketing presentation speaks more to price at a time when price becomes slightly more important to the consumer," Steinhafel said.Target, which operates 1,444 stores in 47 states, opened 26 general merchandise stores and three SuperTarget units in the quarter. In the next few months, the company will add 45 general merchandise stores and 15 SuperTargets. "We continue to invest in new Target stores," said Doug Scovanner, chief financial officer.
"The third quarter will be a bit more challenging," Ulrich said, noting the company faces difficult comparisons; same-store sales rose 5.9 percent in the third quarter of 2005. In addition, the company expects credit card delinquencies to rise in the third quarter, but Scovanner said Target has built up reserves of $501 million.
The company repurchased $550 million of its common stock during the second quarter, acquiring 11.3 million shares.