Target beats expectations; shares rise

Wed Aug 15, 2012 11:09am EDT
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By Jessica Wohl

(Reuters) - Target Corp posted higher-than-expected quarterly earnings and raised its full-year forecast as it won over shoppers with an expanded selection of food in many stores and discounts for its cardholders without sacrificing its profit margins.

Shares of the U.S. discount chain rose 1.8 percent to $64.51 in Wednesday morning trading.

Target has been opening smaller city stores and using other tactics to entice shoppers to visit more often. The company will also sell a line of holiday goods with upscale department store Neiman Marcus Group Inc later this year.

"They are very well positioned," said Shawn Kravetz, president of Esplanade Capital LLC, which has owned Target shares for a little more than a year.

"They do have a slightly more discretionary mix than say a Walmart," Kravetz said. "As the American consumer spends, which they appear to be continuing to do, they will incrementally be a beneficiary of that."

Wal-Mart Stores Inc, which gets the bulk of its sales and profits from its huge U.S. unit, is set to report its results on Thursday. Sales at Walmart U.S. have been rising, but the growth still trails the gains at Target, whose shoppers typically have more discretionary income to spend.

At Target, adding more food to the stores and offering a 5 percent discount to cardholders attracted shoppers but also weighed on profits. Gross margin declined slightly to 31.3 percent in the second quarter ended on July 28 from 31.6 percent a year earlier.

Target needs to "delicately balance" its food and REDcard initiatives with the rest of its plans "in order to maintain reasonable gross margin and not let that slip too much further," said Sandy Skrovan, U.S. research director for Planet Retail.   Continued...

A Target employee returns carts to the store in Falls Church, Virginia May 14, 2012. Target Corp. (TGT) will report its first quarter results on May 16th. REUTERS/Kevin Lamarque