Target Stores help drive 2Q profit up by 27%

Don Hogsett, August 26, 2002

Driven by continued strength at its core Target Stores, and getting a further big lift from its rapidly growing and highly profitable credit card business, second-quarter profits at Target Corp. jumped up by 26.8 percent, to $344 million from $271 million a year ago.

Fueling the earnings growth, the retailer drove profits sharply higher at Target Stores and Marshall Field's, strengthened margins in its retail operations, grew its sales at a double-digit pace while putting a cap on inventories and rapidly grew its credit segment.

Sales from the company's diversified retail operations grew by 11.3 percent, to $9.8 billion from $8.8 billion, driven entirely by a 16 percent gain at Target Stores, while sales trailed off at both Mervyn's and Marshall Field's. Overall same-store sales improved by 3.0 percent, as a solid gain at Target Stores offset continued weakness elsewhere.

An increasingly important performer is the company's rapidly expanding credit card business, where net credit revenues virtually doubled, jumping up by 88.8 percent, to $277 million from $146 million last year. Pre-tax credit profits shot up by 25.2 percent, to $129 million from $103 million, and would have shot up even higher but for sharply rising bad debt reserves, which more than doubled during the period, rising by 128.9 percent, to $103 million from $45 million the prior year as consumer defaults continued to climb in the midst of a rocky economy and a weakening jobs outlook.

Retail sales growth, predictably, was driven entirely by Target Stores, which continue to draw consumers with its powerhouse combination of low prices and hip, trendy merchandise. Target sales shot up by 16.2 percent, to $8.5 billion from $7.3 billion, driven by aggressive expansion. Same-store sales at core Target mass merchant outlets rose by 4.4 percent.

But sales continued to deteriorate at both Mervyn's and Marshall Field's. Sales were off by 5.1 percent at Mervyn's, to $886 million from $931 million last year, a shortfall of $45 million. Mervyn's same-store sales declined by 5.1 percent. Even so, Mervyn's profits declined only slightly, by 1.2 percent, to $59 million from $60 million last year, helped by stronger margins.

Sales at Marshall Field's department stores slipped by 1.4 percent, to $589 million from $598 million, while same-store sales declined by 2.5 percent. But pulling a rabbit out of the hat, Marshall Field's grew its profits by 18.0 percent, to $18 million from $16 million.

In a solid lift to the bottom line, average gross margin improved by 140 basis points, to 32.2 percent from 30.8 percent, driven by improvement at both Target Stores and Mervyn's. In another big assist, stockpiles were kept tightly in check during the period, and inventories rose just 3.2 percent, well behind the 11.3 percent increase in sales.

Target Corp.

Qtr. 8/3 (x000) 2002 2001 % chg
Average gross margin and SG&A expenses are calculated as a percentage of net merchandise sales, excluding credit revenues.
a-Total sales for the second quarter include credit revenues of $277 million, up 88.8 percent from $146 million. Total sales for the six months include credit revenues of $535 million, up 81.5 percent from $294 million a year ago.
Salesa $10,068,000 $8,941,000 12.6
Oper. income (EBIT) 1,008,000 807,000 24.9
Net income 344,000 271,000 26.8
Per share (diluted) 0.38 0.30 26.2
Average gross margin 32.2% 30.8%
SG&A expenses 23.0% 22.4%
Six months 2002 2001 % chg
Sales 19,662,000 17,275,000 13.8
Oper. income (EBIT) 1,988,000 1,579,000 25.9
Net income 689,000 525,000 31.2
Per share (diluted) 0.75 0.58 30.4
Average gross margin 32.2% 31.2%
SG&A expenses 22.9% 22.7%

Target Results by Segment

2002 2001 % chg
Target stores
Sales $8,499,000 $7,311,000 16.2
Same-store sales 4.4
Pre-tax profits 708,000 522,000 35.5
Sales 886,000 931,000 -4.9
Same-store sales -5.1
Pre-tax profits 59,000 60,000 -1.2
Marshal Field's
Sales 589,000 598,000 -1.4
Same-store sales -2.5
Pre-tax profits 18,000 16,000 18.0
Credit cards
Sales 277,000 176,000 57.4
Pre-tax profits 129,000 103,000 25.2

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