Target tops earnings view, but tempers profit outlook

Credit card segment saw strong profits in Q1

MINNEAPOLIS — First-quarter sales at Target increased 2.8% to $15.6 billion, and same-store sales increased 2%, the company reported.

The modest sales growth translated into earnings per share that advance 9.8% to 99 cents, 4 cents better than analysts’ consensus estimate of 95 cents, and net income that increased 2.7% to $689 million. Share repurchase activity contributed to the earnings-per-share growth as Target spent $819 million during the first quarter to buy back 15.4 million shares at an average price of $53.32.

“Our first-quarter financial performance was the result of stronger-than-expected profitability in our credit card segment, which offset the impact of weaker-than-expected sales in our retail segment,” Target’s chairman, president and CEO Gregg Steinhafel said.

Operating profits for the retail segment declined 4.2% to slightly more than $1 billion during the quarter as the company’s PFresh remodeling efforts and 5% rewards program pressured expenses and caused gross margins to contract to 30.4%, compared with 31.3% in the year-ago period.

Target expects to maintain its breakneck pace of store remodeling activity during the remainder of the year, with 300 additional units slated for remodel before October, adding to the 550 units that have already been converted to the PFresh concept.

In contrast to the performance of the retail business, the credit card segment produced unusually strong operating profits, which grew by 75% to $194 million as bad debt expense was virtually nonexistent at $12 million, compared with $197 million. Following the launch of the 5% rewards program, Target’s RED card products now account for 7.6% of the company’s sales.

Looking forward, Target CFO Doug Scovanner said analysts’ current consensus estimate of $1 for the second quarter seems potentially achievable but above the midpoint of a range of likely outcomes, as is the case with analysts’ full-year estimate of $4.23.

As for comps, Scovanner said, “We remain quite likely to achieve 4% to 5 % same-store sales performance in the fall, and I believe we are quite likely to experience better same-store sales growth in the second quarter than we did in the first quarter.”

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