Target Corp.'s second-quarter profit fell 6.3 percent, but it beat Wall Street forecasts, and executives credited the higher profit to a focus on controlling expenses and declining crude oil prices, which lowered transportation costs.
Company officials said during a conference call with investors Tuesday that early signs for the back-to-school season are encouraging and Target should meet its forecast for annual earnings per share of $2.97.
But consumers remain cautious, focusing on necessities like food, instead of nonessentials like apparel and home furnishings, said President, Chairman and CEO Gregg Steinhafel.
"Discretionary categories remain a challenge," Steinhafel said.
The Minneapolis-based discounter's shares rose 8 percent, or $3.14, to $44.35 by midday.
Discounters, particularly Wal-Mart Stores Inc., have benefited from consumers switching to cheaper stores and focusing on necessities. But at Target, where more than 40 percent of revenue comes from nonessentials like funky jeans and bedspreads, the cheap-chic formula that once was its strength has became a drag as shoppers focus on basics. That has forced the discounter to further expand into the food business as a way to drive shoppers into the store more frequently.
Target has been also reducing staff, tightening consumer credit card underwriting, and paring down inventory.
Such expense controls helped Target earn $594 million, or 79 cents per share, in the three months that ended Aug. 1, compared with $634 million, or 82 cents per share, a year earlier. Its revenue fell 2.6 percent to $15.07 billion from $15.47 billion a year earlier.
Analysts surveyed by Thomson Reuters projected a profit of 66 cents per share on revenue of $15.1 million for the second quarter. They see annual earnings of $2.87 per share.
"Second-quarter earnings were stronger than expected due to very strong operating margin in our retail segment and credit card segment performance in line with expectations," Steinhafel said in a statement.
Steinhafel added that Target is focused on several initiatives to drive customer traffic. The discounter has expanded its "low-price" promise in advertising in all stores, matching competitors' local advertised prices on identical items. It also relaunched its store-label Target Brand as Up & Up; it spans 40 categories like health and beauty, and company officials said it is meeting a good initial response.
Target, which began testing a new food format at its stores late last year that offers prepackaged perishable food, reiterated that it plans to expand the concept to 100 new and remodeled stores by year-end. It's now in more than 40.
Shoppers' fixation on essentials like food, which carry thinner profit margins, has put pressure on overall profits.
Company officials also told investors its best customers are coming to Target less often and weekend trips have fallen more than weekday trips. That suggests that shoppers are focusing still more on necessities, according to Kathy Tesija, executive vice president of merchandising.
Profit in Target's credit card business dropped to $63 million for the quarter from $74 million a year earlier, but net write-offs in the unit were $304 million, in line with company expectations for the quarter.
Target sold 47 percent of its credit card receivables to JPMorgan Chase in May 2008.