Stronger credit sales: Priceless

Gary Evans, Don Hogsett, February 24, 2003

Despite an across-the-board slide in same-store sales in all of its retailing units during the holiday season, Target Corp. managed a modest 4.4 percent increase in fourth-quarter profits, helped by a strong performance in its credit card business, where profits shot up by more than 40 percent.

Fueled by the rapid expansion of its Target discount stores, overall retail sales climbed by 5.6 percent, to $13.7 billion from $13.0 billion. But the retailer may be losing some of the luster gained through trendy designs at its core Target stores.

  • Same-store sales at Target Stores slipped by 1.1 percent, even though overall sales climbed higher by 9.0 percent to $11.9 billion from $10.9 billion last year, due entirely to new store openings; Mervyn's same-store sales skidded down by 9.3 percent, and overall Mervyn's sales declined by 9.1 percent, to $1.2 billion from $1.3 billion in the year-ago holiday quarter; and Marshall Field's reported same-store sales and overall sales declined by 6.2 percent, to $800 million from $853 million.

Nowhere was the weakness in same-store sales more obvious than at the bottom line.

  • Target profits increased by 8.0 percent, to $1.2 billion from $1.1 billion, largely due to the new stores that it opened; Mervyn's profits plunged by 42.9 percent, to $75 million from $131 million last year, a shortfall of $56 million; and Marshall Field's profits tumbled by 18.9 percent, to $51 million from $63 million.

Underlining the weakness of the Christmas season at the retailer was the big earnings drop at Marshall Field's, which virtually wiped out the store's profits during the first nine months of the year.

Supporting the bottom line, was the company's expanding credit card business, where profits jumped up by more than 40 percent, to $150 million from $106 million last year, even after writing off $83 million in bad debt from consumers who couldn't pay their bills.

Credit card revenues increased by 48.9 percent, to $329 million from $221 million the preceding year.

Italicizing the importance and strength of the credit card business to Target — even after the hit from bad-debt customers — profits in the business amounted to 45.6 percent of total credit sales. In other words, the company banked roughly $0.46 for every dollar that it lent through its branded Visa cards and various store cards.

Target Corp.

Qtr. 2/1 (x000) 2002 2001 % change
Average gross margin and SG&A expenses are calculated as a percentage of retail sales, excluding credit revenues.
a- Net retail sales, excluding $350 million in credit revenues, up 49.4 percent from $235 million a year ago. For the 12 months, credit sales increased by 68.0 percent, to $1.2 billion from $712 million.
b- Fourth-quarter net income includes $150 million in bad debt expenses in the company's credit card business, up 51.5 percent from the prior year. For the 12 months, bad debt expense totaled $305 million, up 36.2 percent from $224 million a year ago.
Sales $13,711,000a $12,985,000a 5.6
Oper. income (EBIT) 1,267,000 1,196,000 5.9
Net income 688,000b 658,000b 4.4
Per share (diluted) 0.75 0.72 4.3
Average gross margin 30.3% 29.8%
SG&A expenses 19.5% 18.9%
12 months
Sales 42,722,000a 39,114,000a 9.2
Oper. income (EBIT) 3,264,000 2,680,000 21.8
Net income 1,654,000b 1,368,000b 20.9
Per share (diluted) 1.81 1.50 20.3
Average gross margin 31.5% 30.6%
SG&A expenses 22.0% 21.6%

Target segment results

Qtr. 2/1 (x000) 2002 2001 % change
Sales $11,930,000 $10,941,000 9.0%
Same-store sales -1.1
Pre-tax profit 1,165,000 1,078,000 8.0
Sales 1,150,000 1,265,000 -9.1
Same-store sales -9.3
Pre-tax profit 75,000 131,000 -42.9
Marshall Field's
Sales 800,000 853,000 -6.2
Same-store sales -6.2
Pre-tax profits 51,000 63,000 -18.9
Credit Cards
Sales 383,000 269,000 42.4
Pre-tax profit 150,000 106,000 41.5

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