Target Raises Profit Forecast as Groceries Boost Sales

Target Corp. (TGT) raised its annual profit forecast as the second-largest U.S. discount retailer increases sales by adding groceries and enticing more spending from customers with a discount card.

Net income this year will rise to as much as $4.40 a share, the Minneapolis-based chain said today in a statement. That’s up from a previous projection of a maximum of $4.30 a share in May. The average of analysts’ estimates compiled by Bloomberg was $4.30.

The retailer plans to boost sales growth by opening stores in Canada next year, its first expansion outside its home country. Until then, Target has been working to spur sales by adding fresh food sections and offering customers incentives to spend with its credit card, which gives 5 percent off purchases.

“Their retail business is fine,” David Strasser, an analyst for Janney Montgomery Scott LLC in New York, said in an interview. Still, investors should be concerned about Target’s narrowing gross margin and that much of the improvements to its results was generated by the credit-card unit, he said.

Target rose 1.8 percent to $64.50 at the close in New York. The shares have gained 26 percent this year.

Net income in the quarter ended July 28 totaled $704 million, or $1.06 a share, compared with $704 million, or $1.03, a year earlier. Analysts projected $1.01, the average of 22 estimates compiled by Bloomberg.

The results included a one-time tax benefit of 3 cents a share. The company repurchased $549 million in shares, more than the $500 million estimated by Deborah Weinswig, an analyst at Citigroup Inc. Costs related to its entry into Canada reduced profit by 9 cents a share.

Gross Margin

Discounting and selling more food has reduced Target’s profitability because consumers are paying less for items and groceries often have small margins.

Second-quarter retail gross margin, the percentage of sales left after subtracting the cost of goods sold, narrowed to 31.3 percent from 31.6 percent a year earlier. That marked the eighth straight decline.

The company’s credit card unit became less profitable. Income declined 18 percent to $140 million from $171 million a year earlier. That topped Strasser’s income projection by about $40 million.

Sale Talks

The retailer is in talks with several potential buyers of its credit-card receivables and hopes to complete a transaction by the end of this fiscal year or early in the next one, Chief Financial Officer John Mulligan said today on a conference call with analysts. Target had suspended the sale in January.

The percentage of sales being made through its REDCard discount program, which includes Target-issued credit and debit cards, rose to 13 percent from 8.7 percent a year earlier.

Target previously reported that it increased same-store sales 3.1 percent in the second quarter. That followed a gain of 5.3 percent in the first quarter, its best performance in six years, as the warmest temperatures in North America in 50 years encouraged shopping.

The retailer also announced that it invested in a company along with other chains, including Wal-Mart Stores Inc. (WMT), to build a mobile-payment product as a way to cut costs and send deals to consumers.

To contact the reporter on this story: Matt Townsend in New York at mtownsend9@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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