Target raises forecast as earnings impress

MARGINS DIP

Target Corp. posted higherthan-expected quarterly earnings and raised its full-year forecast as it won over shoppers with an expanded selection of food in many stores and discounts for its cardholders without sacrificing its profit margins.

Shares of the U.S. discount chain rose 1.8% to US$64.51 in Wednesday morning trading.

Target has been opening smaller city stores and using other tactics to entice shoppers to visit more often.

“They are very well positioned,” said Shawn Kravetz, president of Esplanade Capital LLC, which has owned Target shares for a little more than a year. “They do have a slightly more discretionary mix than, say, a Wal-mart,” Mr. Kravetz said. “As the American consumer spends, which they appear to be continuing to do, they will incrementally be a beneficiary of that.”

Wal-Mart Stores Inc., which gets the bulk of its sales and profits from its huge U.S. unit, is set to report its results on Thursday. Sales at Walmart U.S. have been rising, but the growth still trails the gains at Target, whose shoppers typically have more discretionary income to spend.

At Target, adding more food to the stores and offering a 5% discount to cardholders attracted shoppers but also weighed on profits. Gross margin declined slightly to 31.3% in the second quarter ended on July 28, from 31.6% a year earlier.

Target said it was “very pleased” with the early results from its first three CityTargets, which opened in Chicago, Los Angeles and Seattle in late July. The stores are about two-thirds of the size of the company’s typical locations and carry a limited selection of some goods.

Target plans to start opening Canadian stores in March or April, after taking over leases for Zellers stores from Hudson’s Bay Co. in 2011.

The company’s profit was unchanged at US$704-million in the second quarter, while earnings per share rose to US$1.06 from US$1.03 a year earlier, when there was more outstanding stock.