Target tops own, analysts’ profit expectations
Third-quarter results at Target were pretty darn good, but they were actually even better than they seemed depending on how one compares this year’s number to the prior year performance. Profits grew 10.2% to 82 cents in the third quarter compared with 74 cents the prior year, thanks to a 4.3% same-store sales increase and ongoing improvement in the company’s credit card business.
The company had forecast earnings per share would fall in a range of 70 cents to 75 cents and analysts’ consensus estimate was 74 cents, so the 82 cents that was reported was a significant earnings beat. What makes the performance more noteworthy, is the current quarter contained expenses related to entry into Canada which negatively affected earnings, while the prior-year period contained tax benefits which artificially inflated earnings. As a result it made comparisons more challenging. For example, Target’s third-quarter 2010 results were aided by a six cents a share tax benefit, while this year’s third-quarter results were negatively affected by expenses of five cents a share from cost related to the Canadian market entry where the retailers first stores aren’t due to open until 2013. Excluding these variables, adjusted earnings per share increased 28% to 87 cents compared with 68 cents.
No wonder Target chairman, president and CEO Gregg Steinhafel said the company was very pleased with results as they reflect strong performance of its U.S. retail and credit card businesses and add increased confidence to the view that the company has the right strategy to drive further improvements.
Sales at the company stores increased 5.4% to $16.1 billion compared with $15.2 billion the prior year, and same-store sales grew at 4.3%. The top line growth translated to operating profits for the division that increased 14.1% to $931 million compared with $816 million. The company also reported that its gross margin rate declined to 30.5% from 30.6%, but expenses declined more significantly, dropping to 21.4% from 21.8%.
The company’s credit card segment also contributed to profits. Although the volume of receivables declined 9.9% to an average of $6.2 billion, the credit quality of the individuals who owe that debt is better which means Target’s bad debt expenses declined to $40 million in the third quarter compared to $110 million the prior year. As a result, the credit card segment’s operating profit increased 10% to $143 million compared with $130 million.