Target buoyed by Field's bucks

Don Hogsett, August 23, 2004

Putting more than a billion dollars in the bank from the sale of its Marshall Field's department store group, Target Corp. virtually quadrupled its second-quarter profits, which raced ahead 295.2 percent, to $1.4 billion from $358 million last year.

But with Marshall Field's out of the way, earnings grew at a more moderate pace of 11.3 percent, to $366 million from $329 million last year — well behind the 25.4 percent earnings growth racked up during the previous quarter. Earnings from continuing operations include a pre-tax charge of $74 million, or 5 cents per share, stemming from the repurchase of $455 million of debt at a premium, using some of the proceeds from the Marshall Field's sale.

Target sales improved 10.2 percent, to $10.3 billion from $9.3 billion during the same period a year ago, helped by a 3.9 percent gain in same-store sales and growth in its important credit card business.

Lending strength to the bottom line, Target bulked up its margins, offsetting higher costs. Average gross margin improved 100 basis points, or 1 percentage point, to 31.8 from 30.8 percent a year ago. Operating costs rose 60 basis points, or six-tenths of a percentage point, to 22.2 percent of sales from 21.6 percent last year.

Taking a bite out of the bottom line, interest expense increased 34.4 percent, to $207 million from $154 million during the same period a year ago.

Target's increasing reliance on directly sourced product is now showing up in the balance sheet as inventories, and as the retailer starts carrying its inventory burden, stockpiles rose almost twice as fast as sales during the second quarter. Inventories rose 20 percent, to $4.9 billion from $4.1 billion, compared with the gain in sales of 10.2 percent.

Target grew its credit card business 3.9 percent, to $293 million from $282 million last year. Pre-tax profits on the credit card business — even after factoring in bad debt costs of $105 million and operating and marketing costs of another $68 million — grew 12.1 percent, to $120 million from $107 million.

Robert Ulrich, chairman and CEO, commented, "We are pleased with our strong results at Target Stores, and confident that we will continue to enjoy profitable market share growth throughout the remainder of 2004 and well into the future. We are also pleased with the significant progress we made during the quarter in completing the sale of Marshall Field's and announcing the pending sale of Mervyn's."

Target Corp.

Qtr. 7/31 (x000) 2004 2003 % chg
Sales $10,277,000 $9,324,000 10.2
Oper. Income (EBIT) 1,094,000 959,000 11.7
Net income 1,416,000a 358,000a 295.2
Per share (diluted) 1.54 0.39 295.2
Average gross margin 31.8% 30.8%
SG&A expenses 22.2% 21.6%
Six months 2004 2003 % chg
Sales 20,186,000 17,987,000 12.2
Oper. Income 2,169,000 1,878,000 15.5
Net income 1,854,000b 707,000b 162.1
Per share (diluted) 2.02 0.77 161.3
Average gross margin 31.7% 31.0%
SG&A expenses 22.0% 21.6%
a-Second quarter results include $31 million in income from discontinued operations, up 6 percent from the same period a year ago; and a $1 billion gain on the sale of discontinued operations, net of $650 million tax.
b-Six month results include $71 million in income from discontinued operations, up 22.6 percent from $58 million during the prior-year period; and a $1 billion gain on the sale of discontinued operations, net of $750,000 tax.

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