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Target tells analysts that credit is a key differentiator, plans to remodel Mervyn's

Minneapolis — Many analysts went into Target's annual meeting for analysts yesterday prepared to take a closer look at the retail corporation's credit operations and question its sagging comp-store growth. Target execs apparently managed to quell their concerns, according to relatively positive follow-up reports issued this morning by Lehman Brothers and UBS Warburg.

Lehman Brothers said that Target is conservatively managing its credit business. Target ended the second quarter with gross accounts receivable of $4.6 billion, an increase of just less than $2 billion from the same period last year, Lehman Brothers said, and Lehman expects that to grow to $6.1 billion by the end of the year, and $7.0 billion to $7.5 billion by the end of 2003. Lehman is rating Target "overweight," meaning its stock is expected to outperform the unweighted industry sector over the next 12 months.

Target management told analysts the company is comfortable with a bad debt expense rate of 9.1 percent and a net charge-off rate of 6.6 percent for the fiscal year — up from 7.6 percent and 6.0 percent from last year, respectively. However, Warburg noted that the underlying delinquency trend has deteriorated somewhat — a condition that has been partially "masked" by the launch of the Target Visa card, whose portfolio contains more creditworthy cardholders. "Credit clearly will continue to be an integral part of [Target's] differentiated strategy vs. [Wal-Mart]," the Warburg report concluded.

Warburg continues to rate Target a "hold," predicting that same-store sales growth will continue to lag Wal-Mart and that Target's growing reliance on credit will weigh on the stock's multiple.

Other takeaways from the meeting included:

— Mervyn's is set for another remodel, according to Warburg, one that will affect 75 percent of the chain over the next three years, with a strong emphasis on national brands. Warburg viewed the news skeptically, noting: "This is essentially an undifferentiated strategy from [Kohl's] without the execution excellence and the real estate advantage."

— Roughly 40 percent of Target's 14 million new square footage next year will be devoted to the SuperTarget grocery/general merchandise combo format, Lehman Brothers reported. Supercenters are expected to end the current fiscal year with 94 units, up from 61 a year ago. Lehman reported that SuperTargets generated 50 percent to 100 percent more volume than a Target discount store.

— The impact of the West Coast dock lockout was less severe than previously imagined, according to Warburg. The backlog should be worked through over the next few weeks. Categories that are not set on time should be in place within 10 days of their original schedule, the report noted.

— Marshall Field's "continues to search for the right pricing strategy with an increased promotional intensity and more focus on opening price points."

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