IT’S FULL SPEED AHEAD: TARGET MEETS WAL-MART MARGINS, BEATS STREET

Byline: Thomas J. Ryan

NEW YORK — Wal-Mart might be running the tightest ship in retailing, but it better look over its bow. Target Corp. is coming on fast.
And Target officials didn’t hesitate to tell Wall Street where they’ve gained ground, in reporting fourth-quarter and yearend results on Tuesday.
In a conference call with Wall Street analysts, Target Corp. officials said their Target discount division’s margin rate had finally “caught up” to Wal-Mart’s domestic discount stores and supercenters. Operating margins at the Target chain grew to 7.8 percent in 1999 from 6.9 percent in 1998, while Wal-Mart improved last year to 7.8 percent from 7.4 percent.
The rapidly expanding Target chain is considered the most upscale and fashionable of major discounters, though it continues to be dwarfed in size by Wal-Mart. Target’s sales reaching $26.1 billion last year versus $100.8 billion for Wal-Mart in the U.S.
But with Target’s margin rate running neck-and-neck with Wal-Mart’s, it’s now clear that the pie is big enough for the two to thrive for years to come, provided they don’t emulate each other.
“I think they have entirely different customers and they both provide reasons to walk into their stores. Some women will only shop at Target, others prefer Wal-Mart,” said Bob Buchanan at A.G. Edwards. “But overall, it’s a Wal-Mart world, and Target has done a fine job of carving out its niche in that world.”
Said Jeff Edelman at PaineWebber: “Target has become a well-differentiated concept, and it’s driving traffic in the stores.”
The 1999 performance of Target Corp., formerly called Dayton Hudson Corp., was capped by a strong fourth quarter, when earnings rose 15.2 percent to $522 million, or $1.12 a share, from $453 million or 97 cents, a year ago, before unusual items in both periods. Results exceeded analysts estimate by 2 cents.
“We are pleased with our financial performance in 1999, led by an exceptional performance at Target,” Bob Ulrich, chairman and chief executive of Target Corp, said in a statement. “We look forward to delivering another year of growth in sales and earnings in 2000.” The corporation also operates Mervyn’s and the department stores Dayton’s, Hudson’s and Marshall Field’s.
Including unusual items primarily related to the buyback of debt, net earnings were $494 million, or $1.06 a share, up from $423 million, or 90 cents, a year ago.
Net revenues for the quarter rose 8.7 percent to $10.9 billion from $10 billion, with same-store sales up 3.5 percent. Target, which accounts for about 80 percent of sales and earnings for the total company, delivered a 5.6 percent same-store sales increase, offsetting declines of 4.8 percent at Mervyn’s and 1.6 percent at the department stores.
Target’s pretax operating net climbed 25.5 percent to $811 million; sales gained 12.8 percent to $8.6 billion.
Mervyn’s pretax operating income slumped 33.9 percent to $69 million; sales dipped 5.2 percent to $1.27 billion
Department store earnings nudged up 4.6 percent, to $120 million; sales eased 1.2 percent to $935 million.
Overall gross margins improved to 30.2 percent from 29.4 percent as a result of “substantial expansion” in gross margin at Target, as well as gains at the department stores. Mervyn’s gross margin rate declined “significantly” in the quarter.
Selling, general and administrative expenses were trimmed to 19.5 percent of sales from 20.5 percent, benefiting from the overall growth of Target, lower bad- debt expense and expense relating to mainframe outsourcing in the prior year, the company said.
Home goods continue to drive overall sales at the Target chain, according to analysts. Julie Loftus, at Banc of America Securities, said Target’s home area is benefiting most from private label merchandise or exclusive deals, such as Calphalon nonstick kitchenware, Michael Graves home accessories and Robert Abbey lamps.
In softlines, children’s, shoes and intimate apparel were the best performers, up in the mid-to-high single digits. Apparel represents about 33 percent of sales.
Analysts estimated that overall women’s apparel was flat or slightly up, reflecting a generally poor climate for apparel in 1999, partly caused by weather. Wal-Mart and Kmart both acknowledged difficulties in apparel last year.
However, Target told analysts that its Xilliration private label juniors line benefited from an upgrading geared to make it more exciting.
Men’s apparel was down for Target last year, and the firm is aiming to reposition the area by focusing on four key brands: Merona, Cherokee, Utility and Pro Spirit. The firm told analysts it plans to more closely edit the line and upgrade fixturing, similar to moves made in juniors.
As expected, Target will continue to be the growth driver for the corporation. Eighty stores are planned for 2000, including 15 superstores, bringing that format to 31 units. The firm operates 907 Target stores, 267 Mervyn’s and 64 department stores.
The department store and Mervyn’s divisions have no planned store openings, since the firm desires to put all its cash into its top performing Target business.
Jeff Stinson, at Midwest Research, expects “steadier results” this year from Mervyn’s. “They’re going to be very tight in inventories and leases. It still generates very strong cash flow,” he said.
Stinson also said the department store division has done better recently as it emphasizes margin control, and he felt that management would sooner jettison Mervyn’s than the department store group: “I think you’ve got some really great [department store] franchises in Chicago, Minneapolis and Detroit. Although the top-line growth has not been dynamic, we have seen strong profits recently.”
Banc of America’s Loftus also said the department stores are key in allowing Target to be current on fashions. “The department store buyers are the ones going to Europe, and they share all that fashion information with Target’s merchants. That’s why they have the right colors and styles,” she said.
During the fourth quarter, the company bought back 2.3 million shares of common stock, at an average price of $64 per share. For the year, the company repurchased 9.4 million shares at an average price of $63, investing $588 million in its common stock.
In the full year, earnings increased 22.4 percent to $1.1 billion, or $2.45 a share, from $935 million, or $1.98, a year ago. Sales gained 10 percent to $33.2 billion from $30.2 billion.
Target also reported February same-store sales rose 3.8 percent. Same-store sales rose 5.4 percent at Target and gained 0.7 percent at Mervyn’s, but fell 5.1 percent at the department stores.

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