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Target Net Edges Ahead, Revenue Soft

Better-than-expected performance in its credit card business helped offset weakness in its stores.

Target Store

Target Corp.’s first-quarter net income rose 2.7 percent as better-than-expected performance in its credit card business helped offset weakness in its stores, the Minneapolis-based retailer said Wednesday.

This story first appeared in the May 19, 2011 issue of WWD.  Subscribe Today.

For the three months ended April 30, Target’s net income was $689 million, or 99 cents a diluted share, from $671 million, or 90 cents, in the 2010 quarter. Total revenues rose 2.2 percent to $15.94 billion from $15.59 billion a year ago, with net sales up 2.8 percent to $15.58 billion and credit card revenues down 18.4 percent to $355 million. Same-store sales rose 2 percent, while retail segment gross margin dropped to 30.4 percent of sales from 31.3 percent in last year’s quarter.

While earnings per share surpassed analysts’ expectations of 94 cents, revenues fell short of the $16.02 billion anticipated, on average, by analysts surveyed by Yahoo Finance.

Kathryn A. Tesija, executive vice president of merchandising, who outlined the retailer’s plans to preserve gross margins in the face of cost inflation during the last earnings call, said, “These pressures accelerated due to rising oil prices and shipping costs. We’re trying to drive down costs through product design and fabric standardization. Increases for spring have been in the low- to midsingle digits for apparel. For fall, increases will move to double digits.”

In January, Target announced plans to sell its credit card business. On Wednesday, it indicated that the deal could be completed this year. Target has boosted sales with its RedCard, which offers a 5 percent discount on purchases. “It is enhancing loyalty among our best guests,” said Gregg Steinhafel, chairman, president and chief executive officer.

The retailer’s continuing P-Fresh program is “driving meaningful increases in traffic and sales,” said Steinhafel, adding that more trips to remodeled stores are lifting traffic by 6 percent. P-Fresh is now in 550 locations; Target expects to remodel 300 more by the end of October. “We want to create a more relevant assortment in a more compelling shopping environment,” Steinhafel said.

Tesija said health, beauty and food performed consistently in the quarter. “In apparel, we continue see incredible growth in C9 by Champion activewear. We believe we have the potential to continue to grow this billion-dollar brand.” A deal Target signed with Levi Strauss & Co. will bring the Levi’s Denizen brand to the U.S. this summer. Launched in Asia last year, Denizen is aimed at the region’s emerging fashion-hungry middle class.

“We continue to evolve our designer partner strategy, focusing on fewer but bigger programs,” Tesija said. “We’re enjoying strong sales in multiple categories with our limited time assortments from Calypso, and we are excited about our limited time partnership with Missoni in September. Missoni, Target’s biggest partnership ever, will span multiple categories including home, apparel, baby and beauty.

Target plans to open 15 stores in the next two quarters and is looking for additional locations. For 2012, the company will open 15 to 20 stores. Five City Targets — the small format retail concept with a customized local approach — will bow in four markets. Target also plans to open 150 stores in Canada by 2014.