Target Posts Better-than-expected Q3 Profits; Sales Up Slightly

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Target Posts Better-than-expected Q3 Profits; Sales Up Slightly

Despite a better-than-expected 18 percent third-quarter profit gain of $436 million vs. $369 million a year ago, Target Corp.’s forecast of a trying holiday season on the heels of tepid early-November results sent its share price down over 5 percent.

With a modest 1.4 percent sales gain to $14.8 billion and a 1.6 percent same-store sales dip during the third quarter ended Oct. 31, Gregg Steinhafel, CEO of the Minneapolis-based retailer, said, “Our early sales results for November provide additional justification for being cautious,” in view of moderately stronger store traffic and smaller-than-average transaction sizes that are collectively creating pressure on top-line sales.

The retailer said its most recent favorable third-quarter profits, which benefited from an ongoing cost-cutting effort and better profits from its credit card business, enabled it to break its eighth consecutive period of quarterly profit declines.

The company said earnings of $1.12 per share for the fourth quarter were possible, but that many factors would need to fall into place to meet or exceed that number. In the meantime, it will continue to plan conservatively amid the current and projected economic environment and expectations for a highly promotional holiday season.

During a conference call with analysts on Tuesday, Steinhafel said: “We are very pleased with Target’s performance in the third quarter, which exceeded our expectations and was the result of responsible planning and consistent execution of our strategy by teams across the company, reflecting a somewhat more stable environment and more compelling merchandise offerings, marketing campaigns and strong store executions, [enabling] our sales and guest traffic during the quarter [to increase] modestly.”

Calling the company’s recent results “[a] notable improvement from its fiscal first-half,” Steinhafel said the company was “able to translate these sales into higher retail profits due to a combination of improved sales in discretionary categories, better margins within categories, and continued strong productivity gains in our stores.”

Steinhafel discussed the retailer’s P-Fresh format rollout that is now in place in 108 stores, including approximately 30 that debuted in Philadelphia last month, and offer “a much deeper food assortment in our general merchandise stores, including perishables, and an expanded offering of dry, dairy and frozen items is one of these opportunities.” As a compelling way “to add convenience for our guests and drive greater trip frequency,” Steinhafel told analysts that the chain committed to the initial 100-store pilot last year after a highly successful two-store test during a period when many retailers were retrenching.

“By carefully evaluating the number of items in each category, this enhanced assortment includes 90 percent of the food categories and approximately 60 percent of the SKUs available in a SuperTarget store,” said Steinhafel, adding that the concept incorporates unique fixtures and visual elements “that clearly convey our commitment to a credible food offering in a general merchandise format. While it is still relatively early to make a definitive judgment on this format, we continue to be very pleased with our initial results and feel confident enough in its future potential to extend our rollout to an additional 350 stores in 2010.”