NEW YORK — Target Corp. pushed the profit bar a couple of cents above forecasts in the first quarter and doubled its decade-end expectations for SuperTarget units.
The Minneapolis-based firm now expects to have 400 of the discount-grocery hybrids by 2010.
Net income during the quarter advanced to $345 million, or 38 cents a share, representing a 35.8 percent improvement over year-ago earnings of $254 million, or 28 cents.Profits per share cleared Wall Street’s expectations of 36 cents with a couple of cents to spare. However, the uncertainty of its outlook led investors to pull the stock down $1.16, or 2.7 percent, to close Tuesday at $41.54 on the New York Stock Exchange.
Revenues for the period ended May 4 pushed up 15.1 percent to $9.59 billion from $8.33 billion a year ago. Comparable-store sales grew 5.2 percent. About 25 percent of the firm’s business is in the soft-lines arena.
Target’s discount stores continued to do the heavy lifting for the quarter, generating almost 90 percent of the firm’s overall pretax profits of $762 million. Overall, inventories fell 6.3 percent on a dollar basis and were about flat at stores open at least a year.
Before taxes, profits at the Target stores leapt 35.1 percent to $678 million, while sales ramped up 18.6 percent to $8.03 billion and comps increased 6.8 percent. To support this growth, inventories increased 11.9 percent on a dollar basis.
On a conference call, Gregg Steinhafel, president of Target stores, noted that the apparel business in the division he heads saw strength in women’s wear as well as footwear. The intimate apparel performance was rated “OK,” while the men’s business “was softer than what we had looked for” across the board.
Mervyn’s pretax profits rose 8.3 percent to $52 million on a sales drop of 0.9 percent to $863 million and a comp decline of 1.4 percent. Marshall Field’s saw an even stronger operating income improvement of 39.1 percent to $32 million on a 0.8 percent decline in sales to $625 million with comps down 2.1 percent. The firm’s credit revenues raced ahead 74.3 percent to $258 million during the quarter.
The total company posted a gross margin improvement of 147 basis points on a first-in/first-out basis for the quarter.U.S. Bancorp Piper Jaffray analyst Jeffrey Klinefelter noted: “It was a solid quarter all the way through. They beat [forecasts] on the top line, beat on the margin and showed improvement on the expense line. It’s really been a well-managed inventory.”
Ladenburg, Thalmann & Co. analyst Eric Beder said it’s “smooth sailing” for the firm over the next two quarters, but that “things get tough for Target after that.” Part of that is difficult comparisons the firm starts coming up against as well as a boost this year from the rollout of the Target Visa card and growth fueled by Montgomery Ward’s sites the firm acquired in March 2001.Of Target’s 1,081 stores at the end of the quarter, 75 of them were SuperTargets, combining the firm’s discount store concept with a shopping center, much as Wal-Mart’s Supercenters do. The firm hopes to double that number by the end of 2004 and elevate it into 400 SuperTargets by 2010.
“The whole concept of grocery stores in a discount department store works much better with Wal-Mart than Target,” said Beder, noting that if the firm had 400 SuperTargets right now, it would still represent less than 40 percent of the chain.
“The Target customer has so many more choices than the Wal-Mart customer does for food,” he said of the firms’ divergent demographics. “It’s never going to have the impact that it has at Wal-Mart.”
Kleinfelter was more bullish on the SuperTarget concept’s potential. “It’s a tremendous growth vehicle for the company. That they outlined that acceleration of stores should tell investors that things are going better than anticipated.”
The SuperTarget concept, he said, “is becoming an increasing part of their growth vehicle.”
Compared to Wal-Mart, he said, Target has “a more compelling assortment of general merchandise. It’s becoming more and more compelling with the addition of national brands. It will be an even more successful formula than it has been for Wal-Mart.”
In a research note, J.P. Morgan Securities analyst Shari Schwartzman Eberts noted: “We continue to struggle to see SuperTarget’s niche in the food space and are concerned that returns on capital may prove lower than expected if food sales productivity does not improve.”