(Updates with analyst’s comment in fourth paragraph.)
Nov. 16 (Bloomberg) -- Target Corp., the second-largest U.S. discount retailer, posted third-quarter profit that topped analysts’ estimates as it sold more higher-margin items and reduced costs.
Net income rose 3.7 percent to $555 million, or 82 cents a share, from $535 million, or 74 cents, a year earlier, the Minneapolis-based company said today in a statement. Excluding some items, profit was 87 cents a share. Analysts projected 74 cents, the average of 20 estimates compiled by Bloomberg.
Chief Executive Officer Gregg Steinhafel boosted sales in Target’s more-profitable categories, such as apparel and home goods, in the quarter. Third-quarter sales at existing locations gained 4.3 percent, the biggest increase since 2007.
“Unlike prior quarters where the upside was driven by a great performance in the credit business, this quarter was driven by exceptional performance in the retail business,” Robert Summers, an analyst at Susquehanna Financial Group in New York, said in an interview. He has a “positive” rating on Target.
Target rose 1.9 percent to $54.20 at 10:38 a.m. in New York. The shares declined 12 percent this year through yesterday.
The retailer’s gross margins have declined for six straight quarters as it adds fresh grocery sections to stores and more shoppers use its discount card program. Third-quarter gross margin, the percentage of sales left after subtracting the cost of goods sold, narrowed 0.1 percentage point to 30.5 percent. Still, the margin was wider than the 30.3 percent median estimate of 10 analysts in a Bloomberg survey.
“There is no reason Target shouldn’t have a strong holiday,” David Strasser, a Janney Montgomery Scott LLC analyst in New York, wrote in a note to clients. Continued improvement in selling more apparel and home goods will be critical for margins next year, said Strasser, who has a “neutral” rating on Target and projected its gross margin would narrow 0.6 percentage point.
Fourth-quarter profit per share on the basis of generally accepted accounting principles will be $1.43 to $1.53. The average estimate of analysts in a Bloomberg survey was $1.46.
Target also helped margins by restraining costs, with selling, general and administrative expenses as a percent of sales declining 0.4 percentage point to 21.4 percent.
Total sales, including revenue from credit cards, rose 5.1 percent to $16.4 billion.
Credit Profit Rises
Profit in the retailer’s credit card unit, which the company plans to sell as early as this year, advanced 10 percent to $143 million as bad debt expense fell 64 percent to $40 million. The penetration of its REDCard rewards program that offers discounts rose to 9.5 percent of sales from 5.5 percent.
Wal-Mart Stores Inc., the world’s largest retailer, yesterday posted third-quarter net income that declined 2.9 percent to $3.34 billion. Profit excluding some items was 97 cents. Analysts projected 98 cents.
Same-store sales at Wal-Mart locations in the U.S. rose 1.3 percent, the first gain in more than two years, as the Bentonville, Arkansas-based retailer slashed prices and returned thousands of products to shelves to lure back shoppers. Wal-Mart forecast same-store sales in its namesake U.S. outlets would rise as much as 2 percent this quarter.
“People are rediscovering the discounters because the overall environment isn’t good,” Summers said.
Target also has been dealing with a shakeup in management. Chief Marketing Officer Michael Francis left the company on Oct. 3 after about a decade to join J.C. Penney Co. and former Target executive Ron Johnson, who took over as the department-store chain’s CEO this month. Francis had been planning Target’s expansion into Canada that will begin in 2013.
Steve Eastman, president of Target.com, left the company on Oct. 13 after the site had a second major outage following taking control of the web store from Amazon.com Inc.
Chief Financial Officer Douglas Scovanner announced on Nov. 1 that he will retire on March 31 after more than 15 years.
(Target will hold a conference call on the results at 10:30 a.m. New York time. To listen, visit TGT US <EQUITY> EVT <GO>.)
--Editors: Kevin Orland, Robin Ajello
To contact the reporter on this story: Matt Townsend in New York at email@example.com
To contact the editor responsible for this story: Robin Ajello at firstname.lastname@example.org