NEW YORK — Although Target Corp. delivered robust first-quarter sales and profits, earnings per share missed the mark.
And the dip in the gross margin rate for the quarter, which caused Target's EPS to fall a penny shy of Wall Street estimates, led several analysts to lower their expectations for the company's full-year profits for 2006 and 2007. The miss also resulted in a downgrade of the stock to "neutral" from "buy" by Merrill Lynch analyst Virginia Genereux. Another analyst, though, said the retailer was poised to deliver double-digit profits for the next five years.
Investors and analysts walked away from the Target conference call Monday with some good news: The retailer said it has not felt any effects of Wal-Mart's efforts to move upscale.
"We are pleased with our first-quarter results," said Bob Ulrich, chairman and chief executive officer, in a statement. He said results reflect the company's "continued success in delighting our guests with the right combination of innovation, design and value."
For the quarter ended April 29, net income rose 12.1 percent, to $554 million, or 63 cents a diluted share, from $494 million, or 55 cents, in the year-ago quarter on total revenues that gained 12 percent, to $12.86 billion from $11.48 billion. Total revenues include an 11.8 percent increase in sales, to $12.49 billion from $11.17 billion. The balance of Target's revenue came from its credit card business. Same-store sales in the period rose 5.1 percent.
Analysts expected earnings of 64 cents a diluted share. Due to the miss, shares of Target closed down 4.2 percent at $50.02 on the New York Stock Exchange Monday. Trading volume was heavy at 24.8 million, which compares with a three-month trading volume of 3.9 million, according to Yahoo Finance.
During a question-and-answer session on the conference call, management was asked about the competitive environment and whether they've noticed any impact from Wal-Mart's efforts to introduce more upscale merchandise. Management said the company hasn't seen "any impact from Wal-Mart." That's partly because Wal-Mart's merchandising push is limited to home goods and there's only a "slight upscaling in apparel," Target executives said, adding that Wal-Mart's upscale focus is "not of any meaningful scale at this point."At a time when many retailers are selling their credit card businesses, Target executives stressed the chain's credit card operation was not for sale. "The credit card portfolio ... continues to generate very, very strong absolute performance and spectacular year-over-year performance, and today is operating at a rate of profitability unmatched by nearly anyone with a substantial bank card portfolio. It's growing and it's hugely profitable. Those aren't usually the dynamics that lead one to question whether or not the business ought to be owned," a company executive said on the call.
Robert Drbul, an analyst at Lehman Bros., was one of several who lowered Target's full-year EPS estimates for 2006 and 2007. Still, Drbul wrote in a research note that he continues to believe "Target is poised to generate 15 percent annual average EPS growth over at least the next five years, driven by 5 percent comp-store sales growth and annual square footage growth of 8 to 10 percent. With almost 1,400 stores, Target is still only approximately 40 percent the size of Wal-Mart's U.S. operation, and we believe it has considerable opportunities for continued expansion over the next 10 years."
Genereux said in her report that inflationary pressures such as wages and energy "may be exerting upward pressure" on Target's operating expenses.
Doug Scovanner, Target's executive vice president and chief financial officer, said during the call that the first-quarter performance gives the company confidence in its ability to "generate a midteen percentage increase in 2006 earnings per share." The cfo said Wall Street's consensus estimates "appear reasonable, given our outlook." First Call's EPS estimate for the second quarter is 69 cents and for the full year is $3.11.
Greg Steinhafel, Target's president, said on the call, "Our sales growth reflected better-than-average performance in toys, children's apparel and nondiscretionary categories like health and beauty, pharmacy and consumables."
One sector that was disappointing was the company's home business, an area company executives said they continue to work on improving. "To consistently deliver the fresh products and excitement that our guests expect, we regularly introduce new products and plans, routinely refine our assortments to reflect current trends and guest preferences and undertake significant category reinventions to provide increased differentiation and/or value," Steinhafel said.Steinhafel said the company rebalances its mix of good, better, best to include quality offerings across its full spectrum of price points. Reinventions were significant in intimate apparel and in bath and beauty. The retailer's bath and body assortment now includes hundreds of new items that used to be available primarily in European specialty stores, while its intimate apparel brands now include Solutions by Hanes.
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