Amid a sluggish economic environment, cautious consumer spending and intense competition, Target Corporation (TGT) posted better-than-expected first-quarter 2012 results on the backs of healthy sales. The quarter benefited from an early Easter and favorable weather conditions.
The company delivered quarterly earnings of $1.11 per share that topped the Zacks Consensus Estimate of $1.01 and rose 11.5% from 99 cents earned in the prior-year quarter. The quarterly earnings fared better than the company’s previous projection of 97 cents to $1.07 per share. The healthy results prompted management to raise its fiscal 2012 earnings expectation.
On a reported basis, including costs related to a Canadian operation and other special items, earnings came in at $1.04 per share, up 5% from the year-ago quarter.
Let’s Unveil the Picture
Total revenue climbed 5.9% to $16,867 million from the prior-year quarter, but fell short of the Zacks Consensus Estimate of $16,871 million. Retail sales grew 6.1% to $16,537 million as shoppers are gradually opening up their wallets but still remain wary.
Minneapolis, Minnesota-based Target said that comparable-store sales for the quarter rose 5.3% compared with a 2% increase registered in the prior-year quarter, and reflects the company’s most robust comparable-stores sales performance in a quarter in over six years. The number of transactions rose 2%, whereas the average transaction amount climbed 3.2% in the quarter.
Gross profit at the Retail segment jumped 5.4% to $4,996 million; however, gross margin shriveled 20 basis points to 30.2%, as the rate of increase in sales were not able to fully offset 6.5% rise in cost of sales. Segment operating income surged 12.9% to $1,199 million, whereas operating margin expanded 50 basis points to 7.3%.
The company indicated that revenue from the Credit Card segment tumbled 7.1% to $330 million. Target also said that segment profit dropped to $141 million in the quarter from $213 million in the prior-year period.
Target’s credit card penetration increased 120 basis points to 7.1%, whereas debit card penetration expanded 280 basis points to 4.5% during the quarter. Total store REDcard penetration climbed to 11.6% from 7.6% in the year-ago quarter.
Management indicated that Target’s P-fresh remodel program and 5% REDcard Rewards program will help sustain sales momentum, continue to drive traffic and enhanced customer shopping experience. The company also hinted of focusing on “Expect More. Pay Less.” brand promise.
Further, Target, in order to tap the urban markets where real estate remains a constraint, plans to introduce smaller-format stores called City Target, and will open the first store in July. Moreover, in order to expand its global footprint, the company is eyeing the Canadian market, with an expected entry in 2013.
Other Financial Details
During the quarter, Target bought back about 10.5 million shares at a price of $57.31 per share, aggregating $604 million, and also paid dividends of $201 million.
The company ended the quarter with cash and cash equivalents (including short-term investments of $18 million) of $675 million, total unsecured debt and other borrowings of $15,950 million and shareholders’ equity of $15,863 million.
Stores Update
Target currently, operates 1,764 stores, of which 521 are general merchandise stores, 992 are expanded grocery assortment and 251 are SuperTarget stores.
Strolling Through Guidance
Target now projects adjusted second-quarter 2012 earnings between $1.04 and $1.14 per share. For fiscal 2012, earnings are expected to be in the range of $4.60 to $4.80 per share, up from $4.55 to $4.75 forecasted earlier.
On a GAAP basis, including expenses related to the company’s entry in the Canadian market, management projected earnings between 94 cents and $1.04 for the second quarter and between $4.10 and $4.30 per share for fiscal 2012.
The current Zacks Consensus Estimates for the second quarter and fiscal 2012 are 99 cents and $4.25 per share. Given the company’s guidance range we could witness correction in the Zacks Consensus Estimates in the coming days with analysts revising their estimates to better align with the company’s outlook.
Let’s Conclude
The economy is still not completely awakened. It is evident that the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may affect their discretionary spending, and in turn curtail the company’s growth and profitability.
Target’s P-fresh remodel program, 5% REDcard Rewards program, City Target stores, The Shops at Target initiatives and its foray into the foreign market are its arsenal to safeguard itself from a further sluggish economic trend or an unexpected downturn.
Target’s efficient marketing, multi-channel strategy, product innovation, compelling pricing strategy and new merchandise assortments, should drive comparable-store sales and operating margins in the long term. We expect the company to gain market share, and believe that more focus on consumable items should boost sales and earnings in the sluggish consumer environment. The company’s long-term objective is to attain $100 billion or more in sales and $8.00 or more in earnings per share by 2017.
Moreover, a greater concentration of the company’s revenue-generating capabilities in limited regions of the United States poses a competitive threat to Target, compared with Wal-Mart Stores Inc. (WMT) and Costco Wholesale Corporation (COST), which are more geographically diverse.
Currently, we maintain our long-term Neutral recommendation on the stock. However, Target retains a Zacks #2 Rank that translates into a short-term Buy rating.
