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Target profit jumps as sales despite so-so sales

Minneapolis – Driven in part by weather shifts, discretionary categories like apparel and some home showed improvement at Target during the discount department store chain’s third quarter.

“Home was less negative than it had been, but the big story in our Q3 [discretionary] mix was apparel,” said Douglas Scovanner, evp, cfo.

Added Katheryn Tesija, evp, merchandising: “[In apparel], our strength is in core and must-haves, and that would apply to home as well. While we still have a healthy business on the fashion side, most of our improvement that came in the quarter came on the must-have side.”

But the trend could be temporary, executives warned, citing slightly softer sales in the first two weeks of this month “and a little bit of give back to the discretionary categories,” said Gregg Steinhafel, chairman, president and ceo, during the 1,743-unit retailer’s earnings call today.

“We have a lot of season ahead of us, and we think that maybe this is as much of a case of retiming of sales as anything. We have got a very strong plan in the fourth quarter for our discretionary categories, and we think that we will continue to perform well on the discretionary side of the business,” he added.

Earlier in the call, Steinhafel offered more insight into Target’s cautious outlook for the holiday selling season. “Our early sales results for November provide additional justification for being cautious in this uncertain environment,” he said. “While store traffic continues to increase over last year, lower average unit retails are leading to a lower average transaction, creating pressure on our top-line sales.”

Tesija explained that because “we have not always gotten credit for outstanding pricing,” Target has been preparing over the past year, “taking steps to underscore value in merchandise assortment and strengthen our price messaging.” Specifically, the effort includes better our in-store signing to communicate price, expansion of the number items included in Target’s competitive shop process, additional space allocated to non-discretionary categories in new and remodeled stores, and other initiatives.

Net earnings for the third quarter shot up 18.4% to $436 million, or 58 cents per share, from $369 million, or 49 cents per share, in last year’s third quarter.

Sales increased 1.4% to $14.8 billion, which Target attributed new store expansion, partially offset by a 1.6% decline in comparable store sales.

 “While still negative, this performance was still somewhat less negative than we expected going into the quarter and much less so than a 6.2% decline we reported in the second quarter,” Scovanner said, adding that key drivers of the third quarter’s comps included a 0.6% increase in traffic.

Year to date, net earnings fell 3.3% to $1.55 billion. Sales were essentially flat, declining 0.3% to $43.7 billion.

Expecting a highly promotional sales environment for holiday, the company said it is planning conservatively.

Next year the company plans to open about 12 total new stores – which will likely result in fewer than 10 additional locations net of closings and relocations. Additionally, Target plans to remodel about 350 existing stores for about $1 billion. About half of that investment will go toward adding the company’s new P-Fresh format of expanded food assortments in about 30 more units in 2010, and the other half will go toward a general refurbishment of existing units.

 

 

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