Target Corporation (TGT), the operator of general merchandise and food discount stores in the United States, recently posted better-than-expected first-quarter 2011 results on the heels of improved profitability across credit card business that helps in alleviating lower-than-expected sales results witnessed at retail stores.
The quarterly earnings of 99 cents a share beat the Zacks Consensus Estimate of 94 cents, and rose from 90 cents earned in the prior-year quarter.
The Zacks Consensus Estimate for the quarter dropped by a penny with 6 out of 23 analysts covering the stock lowered their projections in the last 30 days.
Behind the Headline
Total revenue for the quarter climbed 2.2% to $15,935 million from the prior-year quarter but fell short of the Zacks Consensus Estimate of $16,099 million. Retail sales grew 2.8% to $15,580 million as shoppers are gradually opening up their wallets but still remain cautious on their spending. Consumers are now grappling with rising food and gasoline prices.
Minneapolis, Minnesota-based Target said that comparable-store sales for the quarter grew 2% compared with 2.8% increase registered in the prior-year quarter. The number of transactions rose marginally by 0.4%, whereas the average transaction amount climbed 1.6% in the quarter.
Gross profit at the Retail segment fell marginally by 0.1% to $4,742 million, whereas gross margin shriveled 90 basis points to 30.4%, as increase in sales were not able to fully offset 4.1% rise in cost of sales. Segment operating income dropped 4.2% to $1,062 million, whereas operating margin contracted 50 basis points to 6.8%.
The company indicated that revenue from the Credit Card segment tumbled 18.3% to $355 million. However, Target was quick to indicate that segment profit rose to $194 million in the quarter under review from $111 million delivered in the prior-year quarter helped by a decline in bad debt expenses.
Target’s credit card penetration increased 150 basis points to 5.9%, whereas debit card penetration expanded 120 basis points to 1.7% during the quarter. Total store REDcard penetration climbed to 7.6% from 4.9% 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.
Other Financial Details
During the quarter, Target repurchased about 15.4 million shares at a price of $53.32 per share, aggregating $819 million.
The company ended the quarter with cash and cash equivalents of $1,474 million, total unsecured debt and other borrowings of $11,764 million and shareholders’ equity of $15,230 million.
Target currently, operates 1,755 stores in 49 states, of which 953 are general merchandise stores, 550 are expanded grocery assortment and 252 are SuperTarget stores.
Our View
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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