Discount retailer Target Corp. reported a 13 percent decline in first-quarter profit on Wednesday as it confronts sluggish consumer spending. But the results beat analysts' estimates because of cost-control measures.
The Minneapolis-based retailer said Wednesday that it earned $522 million, or 69 cents per share, for the three months ended May 2. That compares with $602 million, or 74 cents per share, a year earlier.
Revenue was little changed at $14.83 billion, compared with $14.80 billion a year earlier. Sales at stores open at least a year, known as same-store sales, fell 3.7 percent in the quarter. Same-store sales are considered a key indicator of a retailer's health.
Analysts, who usually exclude one-time items, were expecting earnings of 60 cents per share on revenue of $14.81 billion. Shares rose almost 5 percent, or $1.98, to $43.92.
Chairman and Chief Executive Gregg Steinhafel said in a statement that the chain saw strong gains in sales at established stores in necessities like food. He said results from the company's credit card business, which have dragged down its performance in the past because of a rise in delinquencies, were "stable, profitable and consistent" with expectations.
"We believe this improved stability and predictability in key aspects of both our retail and credit card segments reflects the resilience of our strategy," he said.
Profit from the credit card business dropped to $39 million for the quarter from $181 million last year as a result of lower earnings on the overall portfolio and Target's lower investment in the division's average receivables. Target sold 47 percent of its credit card receivables to JPMorgan Chase in May 2008.
Discounters, particularly Wal-Mart Stores Inc., have benefited from consumers switching to cheaper stores. But at Target, where more than 40 percent of revenue comes from nonessentials such as trendy fashions and home goods, the cheap-chic formula that once was its strength became a drag as shoppers cut their spending overall.
Target has been reducing staff, tightening consumer credit card underwriting and freezing senior managers' salaries. It's also expanding further into food sales, which it believes will help drive customer traffic and help it compete with Wal-Mart.
Wal-Mart posted flat first-quarter earnings last week and said that it continues to steal customers away from rivals as it benefits from cleaner stores, spruced up merchandise from clothing to electronics, and friendly service. Groceries account for just about half of Wal-Mart's U.S. sales.
Target is facing pressure from activist shareholder William Ackman to make more dramatic changes. Ackman, who leads hedge fund Pershing Square Capital Management, which owns 7.8 percent of the discounter's outstanding shares, has been fighting to change its board of directors — a move he believes will provide fresh perspectives and make the discounter more profitable.
Target has rejected his proposal to separate Target's stores and distribution centers from the land it owns underneath them. Ackman has been urging the company to look at this and other ways to unlock the company's real estate's value. The shareholders' meeting is set for next week.