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Target earnings rise, but shares sink

Target Corp. reported higher quarterly profit Tuesday, beating estimates on strong holiday season sales and growth in its credit card business, though the stock fell nearly 3 percent amid a broad market sell-off.
/ Source: Reuters

Target Corp. reported higher quarterly profit Tuesday, beating estimates on strong holiday season sales and growth in its credit card business, though the stock fell nearly 3 percent amid a broad market sell-off.

The No. 2 U.S. discount retailer behind Wal-Mart Stores Inc said profit increased to $1.119 billion, or $1.29 per share, in the fourth quarter that ended on Feb. 3, from $939 million, or $1.06 per share, in the same period a year earlier.

Analysts, on average, had been expecting it to earn $1.27 per share, according to Reuters Estimates.

Target posted "pretty decent" earnings figures, said McQueen, Ball & Associates Inc. Chief Investment Officer Bill Schultz. "If earnings data was disappointing, you'd see the stock more down than it is."

Referring to the broad market sell-off, Schultz said, "I'm not sure I'd take all of that as being Target-related."

Target's shares fell $1.70 cents, or 2.7 percent, to $60.82 in afternoon trade. Share markets around the world fell sharply after Chinese stocks saw their worst sell-off in a decade.

Another analyst attributed Target's dipping share price to the quality of its earnings. "At first take, the upside appears to be low quality," said J.P. Morgan Securities Inc. analyst Charles Grom. Strong gross profit margins were more than offset by higher expenses, he said.

Target expects earnings per share to increase by a bigger percentage than sales for the current fiscal year, which began Feb. 4, Chief Financial Officer Doug Scovanner told investors during a conference call.

Scovanner said the average analyst estimate of $3.60 a share was within the range of "likely outcomes" and represented a 12 percent increase over results for the fiscal year ended Feb. 3. The year earlier results included the benefit of a 53rd week, he noted.

"We plan to produce revenue growth in line with our typical low double digit annual increase," reflecting contributions from new store expansion, same store sales growth and credit card revenues, Scovanner said. This would translate to a "high single digit percentage increase" in sales, he said.

In 2007, Target plans to expand its food business and focus on design and product innovations that the retailer hopes will generate excitement among customers.

"They certainly seem to be executing fairly well in all the product mix, taking steps toward expanding into health food business and other offerings that appeal to their growing consumer base of more affluent shoppers," said Schultz.

Target's stock has risen sharply since July, as its sales at stores open at least a year outpaced those at Wal-Mart Stores Inc. , boosted by offerings of trendy-but-inexpensive clothing and home decor.

Last week, Wal-Mart posted a better-than-expected 9.8 percent rise in fourth-quarter profit, but said its apparel and home sales continue to lag.

Target's quarterly revenue rose 16.3 percent to $19.7 billion, while sales at stores open at least a year -- a key retail measure known as same-store sales -- rose 4.8 percent.

Target's sales growth has outpaced Wal-Mart's in recent quarters, partly because it caters to wealthier customers and because it has been successful with its efforts to sell "cheap chic" clothing and home decor.

Target said its credit card business contributed $693 million to earnings before interest and income taxes in 2006, up 53.3 percent from 2005. Credit card operations in the fourth quarter contributed $187 million, an increase of $54 million, of 40.7 percent, from a year ago. The retailer issues a Target Visa card, which has been a profit driver in recent years.

Target shares have traded between $44.85 and $64.73 in the past 52 weeks on the New York Stock Exchange.