Target Corporation (TGT), the operator of general merchandise and food discount stores in the United States, recently posted better-than-expected third-quarter 2011 results on the heels of higher sales and improved profitability across credit card business.
The quarterly earnings of 87 cents a share topped the Zacks Consensus Estimate of 74 cents and surged 28% from 68 cents earned in the prior-year quarter. On a reported basis, including special items, earnings came in at 82 cents, reflecting an increase of 10.2% from 74 cents posted in the year-ago quarter.
The Zacks Consensus Estimate for the quarter increased by a penny with 3 out of 20 analysts covering the stock raising their projections and only one analyst lowering the estimate in the last 30 days.
Target's share rose $1.67 or 3.1% to $54.85 during pre-market trading.
Let’s Unveil the Picture
Total revenue for the quarter climbed 5.1% to $16,402 million from the prior-year quarter, and handily beat the Zacks Consensus Estimate of $16,330 million. Retail sales grew 5.4% to $16,054 million as shoppers are gradually opening up their wallets but still remain cautious on their spending.
Minneapolis-based Target said that comparable-store sales for the quarter grew 4.3% compared with 1.6% increase registered in the prior-year quarter. The number of transactions rose marginally by 0.3%, whereas the average transaction amount climbed 4.1% in the quarter.
Gross profit at the Retail segment jumped 4.8% to $4,889 million; however, gross margin shriveled 10 basis points to 30.5%, as the rate of increase in sales were not able to fully offset 5.7% rise in cost of sales. Segment operating income increased 14.1% to $931 million, whereas operating margin expanded 40 basis points to 5.8%.
The company indicated that revenue from the Credit Card segment tumbled 8.2% to $348 million. However, Target was quick to indicate that segment profit rose to $143 million in the quarter from $130 million delivered in the prior-year quarter helped by a decline in bad debt expenses.
Target’s credit card penetration increased 200 basis points to 6.9%, whereas debit card penetration expanded 200 basis points to 2.6% during the quarter. Total store REDcard penetration climbed to 9.5% from 5.5% 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 4.5 million shares at a price of $50.45 per share, aggregating $226 million. Year-to-date, the company has bought back 34.1 million shares at a price of $50.76 per share, aggregating $1.7 billion.
The company ended the quarter with cash and cash equivalents of $821 million, total unsecured debt and other borrowings of $15,210 million and shareholders’ equity of $15,264 million.
Stores Update
Target currently, operates 1,767 stores in 49 states, of which 640 are general merchandise stores, 875 are expanded grocery assortment and 252 are SuperTarget stores.
Strolling Through Guidance
Target now projects fourth-quarter 2011 earnings between $1.43 and $1.53 per share. The current Zacks Consensus Estimates for the fourth quarter is $1.47.
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.
The company in order to entice customers is also providing an additional benefit of free shipping for any e-shopping to its cardholders, who are already getting 5% off for the purchases they made.
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. However, Target holds a Zacks #2 Rank that translates into a short-term Buy recommendation.
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