Target: profitable and confident

Don Hogsett, May 27, 2002

Minneapolis — Riding high on the strength of its core Target Stores, and getting an unexpected lift from a big jump in profits at its flagging Marshall Field's department store business, Target Corp. boosted its first-quarter profits by 35.9 percent, to $345 million from $254 million last year.

Contributing to the strong earnings growth was a solid improvement in virtually every performance metric at the fast-track retailer, with margins gaining strength, costs coming down, inventories held in check and earnings climbing higher at Target Stores, Mervyn's, Marshall Field's and the credit business.

Driving the robust earnings growth was continued strength at the core Target Stores business, which continues to draw in shoppers with its blend of low prices and hip, trendy merchandise. Sales in Target discount stores shot up by 18.6 percent, to $8.0 billion from $6.8 billion last year, fueled by the rapid rollout of new stores. Same-store Target sales climbed an impressive 6.8 percent.

More to the point, those sales were highly profitable, dropping millions to the bottom line. Pre-tax earnings in the core Target business rose by 35.1 percent, to $678.0 million from $502.0 million.

Earnings climbed higher at Mervyn's and Marshall Field's as well, despite modestly weakening sales. The big surprise was at the laggard Marshall Field's department store division, where pre-tax profits roared ahead by 36.0 percent, climbing to $32.0 million from $23.0 million last year. But sales at Marshall Field's, still pressured in a notably weak environment for full-price department stores, slipped by 0.7 percent, to $625.0 million from $630.0 million last year. Same-store sales fell even further, by 2.1 percent.

Mervyn's earnings climbed by 8.3 percent, to $52.0 million from $48.0 million a year ago. But Mervyn's sales were off by 0.9 percent, to $863.0 million from $871.0 million. Same-store Mervyn's sales slipped by 1.4 percent.

In another assist to the bottom line, credit card pre-tax profits grew by 4.5 percent, to $115.0 million from $110.0 million last year. Credit card sales shot up by 41.4 percent, to $280.0 million from $198.0 million the preceding year. But taking a bite out of profits were rising bad debt expenses, which climbed to $89.0 million from $36.0 million; and operating and marketing costs, which almost doubled, rising to $165.0 million from $88.0 million the prior year.

Further fueling earnings growth, the retailer boosted margins while cutting costs. Average gross margin widened by 70 basis points, to 32.3 percent of sales from 31.6 percent a year ago. Gross margin dollars improved by 16.7 percent, to $3.0 billion from $2.6 billion. Margins improved at all three retailing divisions, the company said.

At the same time, the company managed to prune its costs and hold inventories in check.

Looking ahead, the company said during a conference call with analysts and investors that it's comfortable with the Wall Street forecast for second-quarter earnings of $0.35 cents a share, up 25 percent from $0.28 cents during the same quarter a year ago. The retailer also said it expects total company same-store sales of 4 percent for all of this year.

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