A strong performance by its credit card segment drove a modest bottom-line increase at Target Corp. as first-quarter retail sales growth fell short of both management’s and Wall Street’s expectations.


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Retail News Breaks Archives

Target's credit card business lifts 1Q results

May 18th, 2011

MINNEAPOLIS – A strong performance by its credit card segment drove a modest bottom-line increase at Target Corp. as first-quarter retail sales growth fell short of both management’s and Wall Street’s expectations.

The discount store chain said Wednesday that net income rose 2.7% to $689 million, or 99 cents per share, while total revenues improved 2.2% to $15.58 billion. Analysts surveyed by FactSet had expected earnings of 95 cents and total revenue of $15.99 billion, on average.

Comparable-store sales increased 2% (versus a 2.8% rise a year ago), as a 0.4% uptick in Target’s average transaction count offset a 1.6% gain in the average ticket. The number of units per transaction expanded 4.4% but the selling price per unit decreased 2.6%.

“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-anticipated sales in our retail segment, said Gregg Steinhafel, chairman, president and chief executive officer, in a statement. “Our PFresh remodel program and 5% REDcard Rewards loyalty program continue to deliver incremental traffic and sales in an environment where our guests remain cautious in their spending.”

In a research note, Mark Miller, retail analyst with William Blair & Co., speculated that excluding the impact of the PFresh and REDcard programs would produce a modest downturn in comparable-store sales.

“Despite the EPS upside in the quarter and the easier sales and margin comparisons in coming periods, it is unclear whether Target will be able to accelerate comp-store sales growth (beyond the lower-margin traffic-driving initiatives) to achieve our assumption of roughly 7% retail segment profit growth the remainder of the year,” he wrote.

In the retail segment, earnings before interest expense and income taxes (EBIT) fell 4.2% to $1.06 billion, as the retail gross margin rate declined approximately 90 basis points to 30.4%. The company attributed the margin decline to the PFresh remodel program, which is driving a shift in sales mix toward lower-margin food, and the REDcard Rewards program.

By contrast, the U.S. credit card segment reported a 74.8% jump in segment profit to $2.5 billion, despite an 18.4% decrease in revenues to $355 million. The surge in profitability reflected a 93.9% drop in bad debt expense to $12 million from $197 million a year ago.

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