(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.
Target said it was “very pleased” with the early results from its first three CityTargets, which opened in Chicago, Los Angeles and Seattle in late July. The stores are about two-thirds of the size of the company’s typical locations and carry a limited selection of some goods.
Analysts see CityTarget as a blueprint for how Target plans to run stores in Canada, where its sites are smaller than its typical U.S. shops. Target plans to start opening Canadian stores in March or April, after taking over leases for Zellers stores from Hudson’s Bay Co in 2011.
“The success of this format will essentially depend on whether Target can make the economics of the model work,” Stewart Samuel, a Vancouver, Canada-based senior analyst with food and grocery research firm IGD, said earlier this week.
Occupancy and operational costs are likely to be higher at CityTarget than at Target stores, he said, while customers’ average spending per visit will be lower.
The company’s profit was unchanged at $704 million in the second quarter, while earnings per share rose to $1.06 from $1.03 a year earlier, when there was more outstanding stock.
The profit topped the analysts’ average forecast of $1.01, according to Thomson Reuters I/B/E/S.
The company said costs for the Canada entry had trimmed earnings by about 9 cents per share.
Those expenses were a bit lower than anticipated, and the results benefited from that as well as higher-than-expected profitability in the credit card unit, said Janney analyst David Strasser, who has a “neutral” rating on Target stock.
The percentage of sales paid for with Target’s REDcard credit and debit cards rose to 12.8 percent from 8.7 percent a year earlier.
Target forecast third-quarter earnings per share of 69 cents to 79 cents. Analysts expect it to earn 76 cents.
For the year, Target now expects to earn $4.20 to $4.40 per share, up from its May forecast of $4.10 to $4.30. Analysts are calling for a profit of $4.31 per share.
As previously reported, sales in the quarter rose 3.5 percent to $16.45 billion, while sales at stores open at least a year increased 3.1 percent.
Wal-Mart forecast in May that sales at its Walmart U.S. stores open at least a year would rise 1 percent to 3 percent in the second quarter.
Reporting by Jessica Wohl in Chicago; Editing by Gerald E. McCormick and Lisa Von Ahn