Target Corp.’s first-quarter profits rose 28.5 percent, boosted by sales of high-margin discretionary items, including apparel.

This story first appeared in the May 20, 2010 issue of WWD. Subscribe Today.

Although the economy and consumer sentiment have improved, Gregg Steinhafel, chairman, president and chief executive officer, said on a conference call Thursday that both are “somewhat unstable and fragile” because of high unemployment and large state and federal deficits that “will continue to create uncertainty and volatility. As a result, we continue to be cautious regarding our sales outlook.”

For the quarter ended May 1, Minneapolis-based Target reported net income of $671 million, compared with $522 million in the same year-ago quarter. Earnings per diluted share increased to 90 cents from 69 cents in the same period last year, the highest EPS from continuing operations in Target’s history, excluding holiday-driven fourth-quarter results.

Customers “are putting well-considered discretionary items back in their baskets,” said Kathryn Tesija, executive vice president of merchandising. “They are indulging while feeling smart in their decisions. We’re seeing this trend particularly in home and apparel. Both men and women are freshening up their casual wardrobes and picking up new shoes and accessories for spring.”

At the firm’s retail division, sales rose 5.5 percent in the quarter to $15.16 billion from $14.36 billion, reflecting a 2.8 percent increase in comparable-store sales and the contribution from new stores. Earnings before interest expense and income taxes (EBIT) were $1.11 billion, a 15.2 percent increase from $962 million in the same period last year.

The retailer’s first-quarter gross margin rate was 31.3 percent, up from 30.8 percent in 2009, because of gross margin rate improvements within categories. The impact of the sales mix on gross margin rate was essentially neutral, as sales increased at a similar pace in both higher-margin and lower-margin categories.

The first-quarter sales, general and administrative (SG&A) expense rate was 20.6 percent, down from 20.9 percent a year ago, driven by continued strong productivity improvements in stores, combined with disciplined expense controls.

Brian Sozzi, an analyst at Wall Street Strategies, said customers are going to Target for fresh foods or consumables, such as toothpaste, and shopping for apparel. “[Consumers are] looking for that sense of satisfaction after saving up for so long,” he said.

By contrast, Wal-Mart Stores Inc. called its apparel business a “work in progress” after reporting first-quarter results on Tuesday that topped Wall Street’s estimates. “You definitely don’t see the type of assortment at Wal-Mart that you do at Target,” Sozzi said.

Liberty of London + Target, a limited time program consisting of 300 items across several areas of the store was “an undisputed success,” Tesija said, noting that consumers responded to the color and prints in the collection and the springtime optimism it suggested. “The most popular items were women’s tops and accessories, girls’ dresses, tabletop and storage,” she said.

Target’s collaboration with Zac Posen for Go International in April included 44 pieces with a top price of $200. Cynthia Vincent’s footwear will be available until July, and Eugenia Kim’s hat collection will be in stores through the end of June.

Regarding back-to-school, Tesija said, “last year’s environment was challenging, and we anticipate more favorable results.”

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