Target Corp. Monday posted a 12 percent increase in quarterly profit, but the earnings fell short of Wall Street expectations as margins eroded, sending the stock down 7.7 percent to a year low.
Target said gross margin deteriorated “slightly” from a year earlier, a major concern for investors who had hoped it would at least remain flat. Analysts were awaiting a mid-morning conference call for details.
“Slightly lower gross margin — that’s the issue here,” said Jeffrey Klinefelter, a senior analyst with Piper Jaffray.
“A one penny miss (on earnings per share) is not that significant,” he added. “What is significant is margin trends and what that suggests going forward.”
Target, the second-largest U.S. discount chain, which trails Wal-Mart Stores Inc. in a fiercely competitive segment, maintained its earnings forecast for the full year.
Profit rose to $554 million, or 63 cents per share, in the fiscal first quarter that ended April 29, from $494 million, or 55 cents per share, in the same period a year earlier.
Analysts, on average, expected earnings of 64 cents per share, according to Reuters Estimates. Analysts’ forecasts ranged from 62 cents to 65 cents per share.
Strong spring sales and big gains in the credit card business helped drive the profit growth.
Total revenue rose 12.1 percent to $12.86 billion.
Target’s sales have grown faster than Wal-Mart’s in recent quarters as customers bought trendy-but-inexpensive clothing and housewares. Wal-Mart has been adding its own fashionable merchandise as it tries to close the gap and tempt customers to buy more than just low-margin food.
Wal-Mart is slated to release its earnings Tuesday.
Target’s sales rose 5.1 percent at stores open at least a year — a key retail measure known as same-store sales.
Piper’s Klinefelter said margins should improve in the coming quarters if same-store sales growth remains near the high end of Target’s full-year goal of 4 percent to 6 percent.
Target said its credit card business contributed $162 million to its first-quarter earnings before taxes, up nearly 60 percent from a year earlier. The retailer cited strong growth in net interest income and last year’s changes to federal bankruptcy laws.
For the full year, Target said it still expects earnings per share to show a percentage increase in the mid-teens.
Target’s stock has fallen more than 5 percent so far this year as investors worry about whether consumer spending can withstand steep energy prices and rising interest rates.
Concerns about Wal-Mart’s push into higher-end merchandise — a key market for Target — have also weighed on sentiment. Wal-Mart’s shares are roughly flat year-to-date.
Shares of Target were down $4.00 to $48.21 in early New York Stock Exchange trading, their lowest point since May 2005.