CityTarget love amid modest 2Q growth

Target’s second quarter sales increased 3.5% to $16.5 billion and the company’s profits grew 2.9% to $1.06, five cents better than analysts expected.

The company’s second quarter results were negatively affected by pre-opening expenses related to next year’s entry into Canada. Excluding those expenses, Target said its profits would have increased 4.6% to $1.12 compared to $1.07 last year. Including expenses related to Canada, Target increased its full year profit forecast to a range of $4.20 to $4.40 from an earlier guidance range of $4.10 to $4.30.

"We’re pleased with Target’s strong second quarter financial performance, which reflects a continued focus on delivering an outstanding experience for our guests and disciplined execution of our strategy," said Gregg Steinhafel, Target’s chairman, president and CEO. "In addition, we’re very pleased with the initial response to the July opening of our first three CityTarget locations in Seattle, Los Angeles and Chicago. We look forward to serving guests in these dense urban areas with an exciting store format and uniquely-tailored assortment."

Expectations are high that City Target could provide a boost to growth in the coming years in addition to further benefits from the PFresh remodeling initiative, increased penetration the 5% Rewards program and entry into Canada. When asked about the potential for CityTarget during a second quarter conference call, Steinhafel said it is too early to tell as the first units had only been open a month. It could be 75 stores or several hundred, he said.

The company also is looking forward to opening its first stores in Canada early next year and incurring considerable expense in advance of the openings. Thus, Target has taken to reporting two sets of financials results, one set that includes expenses related to the Canadian entry and another that breaks out those costs to present investors with clearer view of the performance of the U.S. business.

In the case of the latter, investors seem to like what they see and have propelled shares of Target to a 52-week high, despite relatively modest top line growth and declining margins. Operating profits at Target’s U.S. retail segment advanced 2.9% to slightly more than $1.1 billion in the second quarter and gross margins declined to 31.3% from 31.6%. The company said the decline reflected, "the impact of the company’s integrated growth strategies partially offset by underlying rate improvements within categories."

To offset the gross margin decline the company has maintained tight control of expenses within its U.S. operations and as a percent of sales expenses are now 21.1% compared to last year’s 21.3%.


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