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Better Apparel Propels Target

NEW YORK — Margin support from its designer brands helped Target Corp. to a 49.7 percent jump in third-quarter profits, and the company says more close-knit brand relationships are on the way.<br><br>The Minneapolis-based firm’s flagship...

NEW YORK — Margin support from its designer brands helped Target Corp. to a 49.7 percent jump in third-quarter profits, and the company says more close-knit brand relationships are on the way.

The Minneapolis-based firm’s flagship discount division plans to continue to expand its apparel offerings and acknowledged that it was aiming for a relationship with one of the major branded athletic apparel companies.

Meanwhile, Target expects more “modest” growth in the fourth quarter when it faces tougher comparisons and an abbreviated holiday selling season. Comparable-store sales for the Target division are penciled in at flat to up 2 percent for the quarter.

Improved gross margins at each of the firm’s three divisions lifted quarterly net income to $277 million, or 30 cents a diluted share, for the period ended Nov. 2. Results strode past Wall Street’s estimates of 28 cents, with a couple of cents to spare. The quarter’s income compared with year-ago profits of $185 million, or 20 cents, which included a pretax charge of $67 million, or 5 cents a share, related to the firm’s securitized accounts receivables.

Investors greeted the results enthusiastically, as the firm’s shares rose $3.46, or 11.5 percent, to close Thursday at $33.49 in New York Stock Exchange trading.

Revenues for the three-month period were up 9.2 percent to $10.19 billion from $9.33 billion a year ago. Retail sales rose 8 percent to $9.88 billion, while inventories shrunk by 2.9 percent. Comparable-store sales inched up 0.1 percent.

The Target unit drove its pretax profits up 20.9 percent in the quarter to $537 million. Sales strengthened 11.8 percent to $8.46 billion, accounting for 83 percent of the overall corporation’s top line. Comps rose 1 percent, while total inventories at Target stores inched up 1.5 percent.

Douglas Scovanner, chief financial officer and executive vice president, on a conference call, attributed the unit’s strength to strong gross margin rate expansion, offset by expense deterioration that was mainly the result of “relatively low same-store sales growth.”

Through October this year, however, Target’s comp differential with Wal-Mart Stores grew only 10 basis points to 2.6 percent, from 2.5 percent in the comparable year-ago period.

“We know that great merchandising, exclusive brands

and unique designs create excitement for our guests,” said Target division president Gregg Steinhafel. “We do not underestimate the importance of being priced right, being in stock and being able to respond quickly to changing sales trends.”

Target will continue to differentiate its assortment with new brands, license agreements and relationships with designers as well as broader development of its own brands, he said. Industry estimates place Target’s private label penetration at 75 to 80 percent.

The firm noted Liz Lange will launch a maternity collection during the first quarter of 2003, while Isaac Mizrahi will launch a women’s line next fall. Target also boasts apparel offerings from Mossimo, Cherokee and Stephen Sprouse.

According to Steinhafel, more are on the way. “We continue to see brand migration and we have talked to the branded athletic apparel companies and other companies in the midtier to see if there would be a possibility to get together on a strategic basis.” He added that Target would eventually have “some type of relationship” with a major branded athletic company over the long term.

While men’s apparel continued to lag, Steinhafel said, the division’s apparel business during the quarter “grew essentially at the same rate as the store in total.”

Fashion has increasingly become a dynamic front in the discount sector’s wars, with Wal-Mart rolling out its George label globally and bringing in Levi Strauss Signature jeans next year. While Target has the head start in fashion, Wal-Mart’s logistical expertise and pure girth make it the retailer to beat on price.

“We continue to be very focused on Wal-Mart in terms of maintaining a competitive positioning,” said Steinhafel. “We shop them very aggressively on like and identifiable items and have in no way taken our eye off the ball as it relates to being price competitive.”

Mervyn’s pretax profits rose 10.6 percent to $52 million on a 4.4 percent decrease in sales to $917 million. To help it compete with the upcoming entry of Kohl’s into the California market, the chain has expanded its ready-to-wear selection. Mervyn’s also plans to upgrade and remodel three-fourths of its 264 stores over the next three years.

Marshall Field’s pretax earnings rose 9.7 percent to $34 million on a 3 percent sales dip to $677 million.

Target’s credit operations, results of which are included in those of the three retail divisions, had a 10.4 percent rise in pretax profits to $138 million, while revenues shot up 69.4 percent to $310 million in the quarter.

Ladenburg, Thalmann & Co. analyst Eric Beder noted: “The company’s had a really great three-quarter run,” but faces slower growth ahead. Target, he pointed out, faces difficult fourth-quarter comparisons from last year, when business also was aided by the rollout of the Target Visa card.

Beder did acknowledge Target’s growing power in apparel: “They’re going to become a more viable alternative for department stores. They’re going to take apparel share from the department stores, just as Kohl’s is doing.”

Profits for the fiscal year-to-date period advanced 36.1 percent to $966 million, or $1.06 a diluted share, from $710 million, or 78 cents, a year ago. Revenues for the nine months ascended 12.2 percent to $29.86 billion from $26.61 billion a year ago.