BEATING HOLIDAY BLUES, TARGET HITS ITS MARK AND KEEPS ON GROWING
Byline: Vicki M. Young
NEW YORK — No advance warnings. No disappointments. No last-minute words of caution. Just net income, and plenty of it, from Target.
As if to express its gratitude, Wall Street sent shares of Target Corp. up 4.4 percent on the news that the upscale discounter’s fourth-quarter results managed to beat Wall Street’s expectations by 2 cents in spite of a weak holiday retail environment that has made many of Target’s major competitors — with the notable exception of Wal-Mart — look highly vulnerable to swings in consumer moods.
That’s not all. To keep the growth coming, the company also said Tuesday it has acquired the rights to 35 former Wards stores. In addition, along with the early favorable reaction by consumers to the Mossimo launch and full rollout of the Meg Allen apparel line in the fall, Target is considering a national rollout of its Target-branded Visa card later this year.
Wall Street was pleased. Shares of the company on Tuesday closed at $38 in trading on the New York Stock Exchange. In intraday trading, the range was between $37.20 and $39.40, just 20 cents short of its 52-week high. The low is $21.62.
For the quarter ended Feb. 3, Target posted an 11.8 percent increase in income to $552 million, or 61 cents a diluted share, from $494 million, or 53 cents. The performance in the final quarter of the year topped analysts’ estimates by 2 cents. Excluding prior-year unusual items such as a charge for the early extinguishment of debt, the earnings rise was 5.9 percent as year-ago income totaled $522 million, or 56 cents a share.
Sales for the quarter rose 12.8 percent to $12.32 billion from $10.9 billion, reflecting in part a 14-week quarter compared with 13 weeks in the 1999 quarter. Comparable-store sales inched up 1.8 percent in the period.
Bob Ulrich, chairman and chief executive officer, said in a statement, “In 2001, we will continue to manage our business with a disciplined approach and, over the long term, we remain confident in our ability to achieve average annual earnings-per-share growth of 15 percent.”
Bruce Missett, retail analyst at Morgan Stanley Dean Witter, observed, “The Target discount stores have a very consistent distribution channel, even given the shortfall in sales over the holiday season. Target Corp. is a company that manages its expenses and inventory extremely well. It’s about management, management, management. In addition, the Target format is very attractive to consumers even in a softer environment.”
Jeffrey P. Klinefelter, retail analyst at U.S. Bancorp Piper Jaffray, said, “The results are very positive. We are encouraged by the fact that Target exceeded expectations in light of holiday sales, which says a lot about the company’s expense and inventory controls. I think they have great mind share and great market share. The Target division is well positioned to provide both value and trend-right product. The discounter benefits from both sides of the equation, when people trade down from another retail channel and when they channel shift from mall-base specialty stores, because Target now offers what they’re looking for.”
Ulrich said in a conference call with Wall Street analysts that the company is making a substantial investment — about $700 million — to buy and refurbish 35 former Wards stores. The majority of those sites, he said, are in key California markets “where prime real estate is difficult to find.” The stores are set to open in 2002 and are incremental to planned 2002 store openings. Half of those 35 sites are company-owned.
Douglas Scovanner, Target’s chief financial officer, said during the call that total capital spending for the year will be between $3.3 billion and $3.5 billion. The company is also planning to aggressively expand its SuperTarget format. The first supercenter was opened in 1995 and by the end of 2000 it had reached 30 such sites. There will be at least 60 supercenters by yearend.
Jeffrey Feiner, retail analyst at Lehman Brothers, wrote in a research note, “Although expansion of the SuperTarget format is not Target’s primary growth vehicle, the company sees tremendous opportunity in this area as its main competitor, Wal-Mart, began the supercenter concept in a similar low-growth fashion over its first five years. We believe Target has found the correct operational and financial formula to make this initiative a success, and the company feels that it is not time to aggressively pursue this concept.”
Feiner wrote that while management has indicated that the SuperTarget store base can grow to 200 stores by 2010 with incremental revenue of $15 billion to $20 billion, he believes that there may be as many as 300 to 400 such stores in operation over the next 10 years.
Target, which entered the Connecticut market in 2000, is set to enter Maine — its 47th state — later this year. It significantly increased its presence in the Northeast and Middle Atlantic markets during 2000 and has continued to do so in 2001’s early going.
Feiner also noted that he expects the Target division to account for about 81 percent of overall company earnings in 2001, and could likely increase to more than 85 percent over the next three to five years.
For the year, Target’s income was up 10.5 percent to $1.26 billion, or $1.38 a diluted share, from $1.14 billion, or $1.23. Excluding extraordinary items in 1999, year-ago earnings were $1.19 billion, or $1.27 a share, and the increase for 2000 was 6.7 percent. Sales rose 9.5 percent to $36.9 billion for the 53-week year from $33.7 billion in 1999’s 52-week period, while comps were up 2.4 percent.
The pretax segment profit for the year increased 6.3 percent to $2.68 billion from $2.52 billion in 1999. The Target division’s pretax profit increased 10 percent while, reflecting the divergent fortunes of its two brother divisions, Mervyn’s grew 31.1 percent and Marshall Field’s declined 36 percent. Comps for the year rose 3.4 percent at Target and 0.3 percent at Mervyn’s, but declined 4 percent at Marshall Field’s.
During the conference call, executives at Target noted that the launch of the Mossimo line six weeks ago so far has exceeded expectations. In addition, the expected fall rollout of the Liz Claiborne’s Meg Allen apparel line to the entire chain will expand on Target’s umbrella of exclusive brand offerings.
“Mossimo is an outstanding extension of Target’s merchandise. It’s a great marriage of what was a well-known department store brand with operational issues — which found that it could leverage its brand by focusing on design — and a retailer such as Target that can handle the distribution of the product,” Klinefelter said.
For the year, Target’s credit revenue and profitability grew in line with growth in accounts receivable serviced. The contribution from credit in 2000 rose 8.1 percent to $400 million from $370 million in 1999, on yearend serviced receivables of $2.91 billion and $2.68 billion, respectively.
Credit sales account for 30 percent of Mervyn’s sales and, at Marshall Field’s, 40 percent.
Feiner concluded that the firm’s intention to grow square footage at least 8.5 percent a year — with an acceleration to 12 percent to 14 percent in 2001 — coupled with favorable comprable-store sales growth in the low single digits and continued effective expense management should enable Target to attain a 15 percent average annual earnings-per-share growth for the next five to 10 years.
Target also invested $591 million in 2000 to repurchase 21.2 million shares of company stock at an average price of $27.92.
Separately, the Minneapolis, Minn.-based discounter said Tuesday that it donated $15,000 to the American Red Cross to help Seattle-area earthquake victims. In addition volunteers from Target Stores and Mervyn’s are helping with clean-up efforts. The quake, which struck on Feb. 28, was the area’s most powerful earthquake in 50 years. Target’s donation will be used to provide clothing, apparel, water, baby formula and health care supplies. In addition, 1,000 Helping Hugs plush bears were donated to comfort children.