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Target Earnings Drop on Soft Sales

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Amid a sluggish economic environment, cautious consumer spending and intense competition, Target Corporation (TGT - Free Report) , the operator of general merchandise and food discount stores in the United States, posted first-quarter fiscal 2013 results. The quarterly earnings, including U.S. and Canadian operations, came in at 81 cents a share that dipped from $1.03 reported in the prior-year quarter.

Target’s adjusted earnings of $1.05 per share also dropped from $1.11 delivered in the year-ago quarter. This relates to results from U.S. operations only. Analysts polled by Zacks had projected earnings of 86 cents per share for the quarter.

The quarterly earnings fell short of Target’s earlier projection of $1.10 to $1.20 per share for the quarter under review. Management stated that the earnings came in below expectation due to lower-than-anticipated sales witnessed principally in apparel and other seasonal and weather-related categories.

Let’s Unveil the Picture

Total revenue edged down 1% to $16,706 million from the prior-year quarter, and came below the Zacks Consensus Estimate of $16,897 million. Sales for the U.S. segment, which now comprise U.S. Retail and U.S. Credit Card segments after the sale of U.S. credit card portfolio in Mar 2013, came in at $16,620 million and climbed marginally by 0.5%.   

Minneapolis, Minn. based company, Target, said that comparable-store sales for the quarter fell 0.6% compared with 5.3% increase registered in the prior-year quarter. The number of transactions edged down 1.9%, however, the average transaction amount climbed 1.3% in the quarter.

Gross profit at the U.S. segment rose 2.3% to $5,111 million, whereas gross margin expanded 50 basis points to 30.7%. Segment operating income decreased 7.5% to $1,239 million, whereas operating margin contracted 60 basis points to 7.5%.

Target’s credit card penetration increased 140 basis points to 8.5%, whereas debit card penetration expanded 410 basis points to 8.6% during the quarter. Total store REDcard penetration climbed to 17.1% from 11.6% in the year-ago quarter.

We believe Target’s P-fresh remodel program, 5% REDcard Rewards program and Price Match strategy will help sustain sales momentum, continue to drive traffic and enhanced customer shopping experience. In order to tap the urban markets where real estate remains a constraint, the company plans to open smaller-format stores called CityTarget. Moreover, in order to expand its global footprint, the company is eyeing Canadian market with a store opening plan of 124 in 2013. In the first quarter 24 Canadian stores were opened. Sales generated during the quarter were $86 million.

Target’s credit and debit cards penetration in Canada both came in at 1%. Total store REDcard penetration came in at 2%.

Other Financial Details

During the quarter, Target bought back about 8.5 million shares at a price of $64.04 per share, aggregating $547 million, and also paid dividends of $232 million.

The company ended the quarter with cash and cash equivalents (including short-term investments of $1,112 million) of $1,819 million, long-term debt and other borrowings of $13,691 million and shareholders’ equity of $16,520 million.

Stores Update

Target currently operates 1,784 stores, of which 359 are general merchandise stores, 1,168 are expanded grocery assortment, 251 are SuperTarget stores and 6 are CityTarget stores.

Strolling Through Guidance

Target now projects adjusted earnings in the range of $1.09 to $1.19 for the second quarter and between $4.70 and $4.90 per share for fiscal 2013.

On a GAAP basis, including dilution due to entry in the Canadian market and impacts related to the divestment of the credit card portfolio, management forecasted earnings between 90 cents and $1.00 for the second quarter and in the band of $4.12 to $4.32 for fiscal 2013.

The current Zacks Consensus Estimates for the second quarter and fiscal 2013 are $1.05 and $4.49 per share, respectively.

Let’s Conclude

Target is persistently trying every means to keep afloat in an economy, which is still not completely awakened from the state of hibernation. 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 a sluggish consumer environment.

The economy has not yet recovered fully. 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.

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 - Free Report) and Costco Wholesale Corporation (COST - Free Report) , which are geographically diverse and more resourceful.

Currently, Target holds a Zacks Rank #3 (Hold). Another stock to be merited in the retail discount store chain sector is The TJX Companies, Inc. (TJX - Free Report) , which carries a Zacks Rank #2 (Buy).

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