Accelerating comps drive Target performance

MINNEAPOLIS — Target reported second quarter earnings per share of $1.03 that beat analysts’ estimates by a nickel, and the company elevated its full year profit forecast amid ongoing success of key initiatives.

Retail sales increased 5.1% to $15.9 billion from $15.1 billion thanks to a 3.9% same-store sales increase and the addition of several new stores. Operating profit for the retail business increased at a slower rate, rising 4.6% to $1.147 billion from $1.096 billion.

Operating profits in the company’s credit card segment grew nearly 15% to $171 million from $149 million the prior year despite revenues that declined to $345 million from $406 million, as Target incurred just $15 million in bad debt expense compared with $138 million the prior year.

“We’re very pleased with our second quarter financial results, which benefited from acceleration in the pace of our comparable-store sales growth,” said Gregg Steinhafel, Target chairman, president, and CEO. “We continue to focus on strong execution of our strategy, preparing Target to perform well in a variety of economic environments.”

The second quarter earnings per share of $1.03 were nearly 12% higher than the prior year’s 92 cents a share, while net income grew 3.7% to $704 million. Earnings per share grew at a faster rate due to an aggressive share repurchase program, which reduced the number of outstanding shares. The company said it spent $688 million during the second quarter to buy back 14.3 million shares at an average price of $48.11. At the midpoint of the year the company has spent roughly $1.5 billion to buyback 29.7 million shares.

A third quarter profit forecast of 70 cents to 75 cents encompassed analysts’ consensus estimate of 71 cents, however the full year outlook the company provided of $4.15 to $4.30 was higher that the $4.12 analysts envisioned.

One negative data point in the second quarter results was the gross margin impact of some of the company’s key initiatives. The ongoing rollout of the PFresh format with its expanded assortment of food and consumables has a higher percentage of Target’s sale coming from lower margin goods. In addition, Target’s product assortment in these categories is priced competitively with Walmart. Gross margin pressure is compounded by the increased penetration rate of shoppers participating in the REDcard Rewards loyalty program, which deducts 5% from the purchase price at checkout. As a result, the gross margin rate declined to 31.6% in the second quarter from 32% the prior year and further declines are expected as the PFresh rollout continues and more customers participate in the 5% discount program.

Offsetting the lower margins, the company improved its expense control with selling, general and administrative expenses declining to 21.3% of sales compared with 21.5% of sales.

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