Target Corporation (TGT), the operator of general merchandise and food discount stores in the United States, recently posted third-quarter 2010 results. The quarterly earnings of 74 cents a share beat the Zacks Consensus Estimate of 68 cents, and rose 28.5% from 58 cents delivered in the prior-year quarter.
The Zacks Consensus Estimate for the quarter was stable prior to the earnings announcement with 2 out of 23 analysts covering the stock raising their estimates and 2 analysts lowering their projections in the last 30 days, thereby neutralizing the effect.
The increase in quarterly earnings was driven by effective cost management and improved profitability at retail and credit card segments that overshadowed lower-than-expected sales.
Total revenue for the quarter climbed 2.2% to $15,605 million from the prior-year quarter but fell short of the Zacks Consensus Revenue Estimate of $15,610 million. Retail sales grew 3% to $15,226 million as shoppers are gradually opening up their wallets.
The Minneapolis, Minnesota based company said that comparable-store sales for the quarter grew 1.6%, an improvement over a decline of 1.6% registered in the prior-year quarter. The number of transactions rose to 2.1%, whereas the average transaction amount dropped marginally by 0.5% in the quarter.
Management now expects fourth-quarter 2010 comparable-store sales to be the best in the last three years based on efficient marketing and merchandise plans, remodel program and a 5% REDcard rewards program.
Despite a 3.3% increase in cost of sales, gross profit at the Retail segment climbed 2.3% to $4,664 million, aided by sales growth witnessed across the segment; however, gross margin contracted slightly by 20 basis points to 30.6%. Segment operating income jumped 3.2% to $816 million, whereas operating margin expanded 10 basis points to 5.4%.
Target's efficient marketing, multi-channel strategy, product innovation, compelling pricing strategy, and new merchandise assortments, should help drive comparable-store sales and operating margins in the long term. We expect the company to gain market share, and believe that more focus on consumable items should boost sales and earnings in a sluggish consumer environment.
The company said that revenue from the Credit Card segment tumbled 22.2% to $379 million. However, Target was quick to indicate that segment profit rose to $130 million in the quarter under review from $60 million delivered in the prior-year quarter, helped by a 64% decline in bad debt expenses.
During the quarter, Target repurchased about 15.2 million shares at a price of $52.29 per share, aggregating $793 million, under the share repurchase program authorized in November 2007.
Target currently operates 1,752 stores in 49 states, of which 1,501 are Target general merchandise stores and 251 are SuperTarget Stores.
The company ended the quarter with cash and cash equivalents of $936 million, total unsecured debt and other borrowings of $12,551 million and shareholders' equity of $14,879 million.
Our View
Target's efficient marketing, multi-channel strategy, product innovation, compelling pricing strategy and new merchandise assortments, should help drive comparable-store sales and operating margins in the long term. We expect the company to gain market share, and believe that more focus on consumable items should boost sales and earnings in a sluggish consumer environment.
Target now tends to focus more on store renovations and enhancing store sales productivity, introducing smaller format stores, and eyeing opportunities to open stores in the international markets beyond a period of 3 to 5 years. We believe the opening of stores outside the United States will definitely boost the company's top and bottom lines and improve cash flow.
The greater concentration of Target's revenue generating capability in a few regions of the United States, poses a competitive threat, compared to Wal-Mart Stores Inc. (WMT) and Costco Wholesale Corporation (COST), who are geographically more diversified and more resourceful.
Consequently, we prefer to be Neutral on Target. Moreover, the Zacks #3 Rank, which translates into a short-term ‘Hold' rating, correlates with our long-term recommendation.
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