Credit, core biz push Target in Q2

Don Hogsett, August 18, 2003

Propped up by its rapidly growing and vastly profitable credit card business, along with its core Target stores, Target Corp. pushed second-quarter profits up by 4.1 percent, to $358 million from $344 million last year, offsetting weakness in its Mervyn's and Marshall Field's units.

Sales at the retail giant rose by 8.7 percent, to $10.6 billion from $9.8 billion, with all of the top-line growth coming from either the core Target Stores or credit cards.

Providing the biggest lift to the bottom line, as usual, was the core Target business, where operating profits grew by 5.7 percent, to $749 million from $708 million last year. Target sales improved by 11.3 percent, to $9.5 billion from $8.5 billion, driven by continued expansion. But same-store sales grew at a relatively sluggish pace of 2.7 percent.

In another strong assist, operating profits at the growing credit card portfolio jumped up by 24.0 percent, to $160 million from $129 million last year. Sales in the credit card business surged by 22.9 percent, to $322 million from $262 million. Underlining the importance of the credit business to Target, even after expenses and writing off consumer bad debt, the company generated a profit of fifty cents for every dollar of credit sales.

And the company needed every one of those profit dollars from credit cards to offset continued weakness at its Mervyn's and department store units. Mervyn's profits sank by 46.1 percent, to $31 million from $59 million, while Marshall Field's earnings dropped by 30.6 percent, to $13 million from $18 million.

Sales suffered as well at Mervyn's and Marshall Field's. Sales at Mervyn's fell by 7.3 percent, to $821 million from $886 million, while same-store sales declined by 7.9 percent. Department store sales slipped by 3.4 percent, to $569 million from $589 million, and same-store sales dipped by 2.4 percent.

Taking a bite out of the bottom line, margins thinned out while costs climbed higher in Target's retailing business. Average gross margin narrowed by 30 basis points, or three-tenths of a percentage point, to 31.9 percent from 32.2 percent, due largely to continued rapid growth at Target, the company's lowest-margin division.

Operating costs climbed by 20 basis points, or two-tenths of a percentage point, to 23.2 percent from 23.0 percent a year ago.

Second quarter segment results

2003 2002 % change
Sales $9,458,000 $8,499,000 11.3%
Same-store sales 2.7
Pre-tax profit 749,000 708,000 5.7
Sales 821,000 886,000 -7.3
Same-store sales -7.9
Pre-tax profit 31,000 59,000 -46.1
Marshall Field's
Sales 569,000 589,000 -3.4
Same-store sales -2.4
Pre-tax profits 13,000 18,000 -30.6
Credit cards
Sales 322,000 262,000 22.9
Pre-tax profit 160,000 129,000 24.0

Target Corp.

Qtr. 8/2 (x000) 2003 2002 % chg
Sales $10,642,000 $9,791,000 8.7
Oper. income (EBIT) 734,000 713,000 2.9
Net income 358,000 344,000 4.1
Per share (diluted) 0.39 0.38 3.5
Average gross margin 31.9% 32.2%
SG&A expenses 23.2% 23.0%
Six months
Sales 20,625,000 19,127,000 7.8
Oper. income (EBIT) 1,439,000 1,404,000 2.5
Net income 707,000 689,000 2.7
Per share (diluted) 0.77 0.75
Average gross margin 32.1% 32.2%
SG&A expenses 23.3% 22.9%

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