Target Corporation (TGT), the operator of general merchandise and food discount stores in the United States, recently posted better-than-expected second-quarter 2011 results on the heels of higher sales and improved profitability across credit card business.
The quarterly earnings of $1.03 per share beat the Zacks Consensus Estimate of 97 cents, and rose from 92 cents earned in the prior-year quarter.
The Zacks Consensus Estimate for the quarter increased by a penny with 5 out of 23 analysts covering the stock raising their projections and only one analyst lowering the estimate in the last 30 days.
Behind the Headline
Total revenue for the quarter climbed 4.6% to $16,240 million from the prior-year quarter, and handily beat the Zacks Consensus Estimate of $16,194 million. Retail sales grew 5.1% to $15,895 million as shoppers are gradually opening up their wallets but still remain cautious on their spending.
Minneapolis, Minnesotabased company, Target, said that comparable-store sales for the quarter grew 3.9% compared with 1.7% increase registered in the prior-year quarter. The number of transactions rose marginally by 0.5%, whereas the average transaction amount climbed 3.5% in the quarter.
Gross profit at the Retail segment jumped 3.9% to $5,023 million; however, gross margin shriveled 40 basis points to 31.6%, as the rate of increase in sales were not able to fully offset 5.6% rise in cost of sales. Segment operating income increased 4.6% to $1,147 million, whereas operating margin remained flat at 7.2%.
The company indicated that revenue from the Credit Card segment tumbled 15% to $345 million. However, Target was quick to indicate that segment profit rose to $171 million in the quarter from $149 million delivered in the prior-year quarter helped by a decline in bad debt expenses.
Target’s credit card penetration increased 190 basis points to 6.6%, whereas debit card penetration expanded 160 basis points to 2.1% during the quarter. Total store REDcard penetration climbed to 8.7% from 5.2% in the year-ago quarter.
Management indicated that Target’s P-fresh remodel program and 5% REDcard Rewards program will help sustain sales momentum, continue to drive traffic and enhanced customer shopping experience. Target in order to expand its global footprint is eying Canadian market with an expected entry in 2013.
Other Financial Details
During the quarter, Target repurchased about 14.3 million shares at a price of $48.11 per share, aggregating $688 million. Year-to-date, the company has bought back 29.7 million shares at a price of $50.81 per share, aggregating $1.5 billion.
The company ended the quarter with cash and cash equivalents of $890 million, total unsecured debt and other borrowings of $13,791 million and shareholders’ equity of $15,106 million.
Target currently, operates 1,762 stores in 49 states, of which 774 are general merchandise stores, 736 are expanded grocery assortment and 252 are SuperTarget stores.
Walking Through Guidance
Target now projects third quarter earnings between 70 cents and 75 cents a share, and fiscal 2011 earnings in the range of $4.15 to $4.30. The current Zacks Consensus Estimates for the third quarter and fiscal 2011 are 71 cents and $4.13 per share, respectively.
Given the company’s guidance range we could witness correction in the Zacks Consensus Estimates in the coming days with analysts tweaking their estimates to better align with the company’s outlook.
Let’s Conclude
Target’s efficient marketing, multi-channel strategy, product innovation, compelling pricing strategy and new merchandise assortments, should help drive comparable-store sales and operating margins in the long term. We expect the company to gain market share, and believe that more focus on consumable items should boost sales and earnings in a sluggish consumer environment.
Target now tends to focus more on store renovations and enhancing store sales productivity, introducing smaller format stores, and eyeing opportunities to open stores in the international markets.
The greater concentration of Target’s revenue generating capability in a few regions of the United States, poses a competitive threat, compared to Wal-Mart Stores Inc. (WMT) and Costco Wholesale Corporation (COST), who are geographically more diversified and more resourceful.
Consequently, we prefer to have a long-term ‘Neutral’ rating on the stock. Moreover, Target holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
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