Target Profit Up, Plans Strong 2010

James Mammarella, March 1, 2010

With an impressive 53.3% upswing in earnings for the fourth quarter, to $1.24 per share, Target Corporation finished 2009 on a high note, posting a convincing full-year earnings mark of $2.86 per diluted share, up 15.2% from 2008.

Retail sales grew 3.7% in Q4, to $19.7 billion, while full-year sales rose 0.9% to $63.4 billion. Comp store sales edged up 0.6% in the quarter ended Jan. 30, but were down 2.5% for the year.

Target chairman, president and ceo Gregg Steinhafel said the results “reflect substantial innovation and disciplined execution by teams across the company.”

Speaking to analysts last week, Steinhafel said of one key effort, “In 2009 we set out to remove price as a perceived barrier to shopping at Target — and surveys indicate that we've made meaningful progress.”

He observed, “Compared to a year ago, sales trends are much stronger and volatility is much lower.” Target will achieve an even stronger 2010, Steinhafel said with confidence. There are four main brick-and-mortar plans Target is working on, he said:

Refresh the existing store base, with special impact in the food, home, beauty and electronics departments;Expand the high-return-on-investment general merchandise in SuperTarget stores;Develop smaller-footprint format for dense urban markets (a longer term effort);Open international stores, potentially in Canada, Mexico and Latin America (longer term);

The 1,740-store chain plans $2 billion to $2.5 billion in capital expenditure in 2010, mainly applied to its big remodel program that will impact 340 locations. The chain will also open 13 new stores this year.

There was some solid good news for vendors of home furnishings.

Kathryn Tesija, evp merchandising, said of Target shoppers, “Their confidence is leading them to add a few more home and apparel items to their basket. This subtle change in guest behavior is a sign we narrowed the sales gap between our discretionary and non-discretionary businesses.”

Responding to an analyst's question about sourcing costs, Tesija said she expected costs to remain flat this year for apparel, while home goods products would be “slightly” up by the fall. Answering another analyst's question, Steinhafel noted that direct imports are down to about 26.5% of goods (from the 30% high water mark at the end of 2007), but Target expects to expand the effort as demand for discretionary merchandise starts to recover.

Of the remodeling campaign, Tesija drew analysts' attention to “home, where we're making our own brands even more appealing and intuitive to shop by clarifying the assortment, better defining and aligning each style with guest segments, and where we're improving the shopping environment by creating a more open and visually compelling department that features dominant worlds, inspirational signage and more opportunities to actually touch and feel the product.”

Core basics have been the strongest contributors in home, said Tesija, who said the relaunch of the opening-price-point Room Essentials store brand was off to a “great start.” She said that 2009's “Great Save” warehouse club-style event yielded better results that the previous year's “Home Design” event.

Doug Scovanner, evp and cfo, gave a qualified, upbeat outlook.

Target Corporation

Qtr. 1/30 (millions) 2010 2009 %change
a. Sales: retail sales, not including credit card revenues.
b. Operating income (EBIT): retail segment earnings before interest expense and income taxes, not including credit card revenues or expenses.
c. Average gross margin: retail segment only.
d. SG&A expenses: retail segment only.
Sales $19,719a $19,023a 3.7%
Oper Income (EBIT) $1,560b $1,251b 24.7
Net income $936 $609 53.7
Per share (diluted) $1.24 $0.81 53.8
Average gross margin 29.1%c 27.3%c --
SG&A expenses 18.5% d 18.3%d --
12 months
Sales $63,435a $62,884a 0.9%
Oper Income (EBIT) $4,376b $4,081b 7.3
Net income $2,488 $2,214 12.4
Per share (diluted) $3.30 $2.86 15.2
Average gross margin 30.5%c 29.8%c --
SG&A expenses 20.5%c 20.4%c --

“The current First Call median estimate for the year is $3.62,” Scovanner noted, saying, “This figure is clearly within a potential range of achievability.” He indicated he thought the First Call projection of 76 cents per share for Q1 was a bit optimistic.

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