Improved profits result of operational discipline

Sales and profits at Target may have declined in the second quarter, but the company’s performance was better than expected, and the company’s shares were sharply higher Tuesday morning. Profits declined to $594 million from $634 million and earnings per share dropped 3.9%to 79 cents from 82 cents, but that figure handily exceeded analysts’ consensus estimate of 66 cents, thanks to margin improvement and expense control.

“Second quarter earnings were stronger than expected due to very strong operating margin in our retail segment, and credit card segment performance in line with expectations,” said Target chairman, president and chief executive officer Gregg Steinhafel. “Looking forward to the second half of the year, we are focused on initiatives to drive incremental traffic and sales in our stores while maintaining disciplined execution in both of our business segments.”

The company’s gross margin rate improved to 31.9% from 31.2% and its expense rate was reduced, which aided profits despite sales weakness. Retail sales decreased 2.7% in the second quarter to $14.6 billion from $15 billion, as a 6.2% decline in same-store sales was more than could be offset by the impact of the addition of new stores. Operating profits for Target’s retail segment declined 3.1% to slightly more than $1 billion.

Target’s credit business remains a concern, despite what the company called “improve portfolio performance.” Write-offs during the quarter totaled $304 million, a figure that was in line with the company’s expectations. Operating profits for the segment declined to $63 million from $74 million, and the allowance for doubtful accounts totaled slightly more than $1 billion, indicating a high degree of pessimism about the ability and willingness of credit customers to pay their bills in future periods.