Target Corp. (TGT), the second-largest U.S. discount retailer, said third-quarter profit increased 15 percent as its branded credit cards boosted store sales.
Net income in the quarter ended Oct. 27 rose to $637 million, or 96 cents a share, from $555 million, or 82 cents, a year earlier, the Minneapolis-based company said in a statement. Analysts projected 96 cents, the average of six estimates compiled by Bloomberg.
Chief Executive Officer Gregg Steinhafel has spent the past two years squeezing more sales from Target’s 1,700 U.S. stores by adding fresh food and exclusive merchandise. The chain also has encouraged more spending from its best customers by giving 5 percent discounts on purchases made with a Target-branded credit or debit card.
“Target’s fundamentals remain solid,” Charles Grom, an analyst at Deutsche Bank AG in New York, wrote in a note to clients before the results. The company has shown increases in store traffic with growing penetration of fresh food and loyalty card users, said Grom, who recommends buying the shares.
Those initiatives have helped maintain sales growth as the company slowed store openings in preparation for its first expansion outside the U.S. next year to Canada. Revenue from established stores increased 3.7 percent this year through October, the company said Nov. 1. Target posted a gain of 3 percent for all of last year.
Target rose 0.8 percent to $61.85 at 9:57 a.m. in New York. The shares had gained 20 percent this year through yesterday.
Gross Margin Narrows
The third-quarter results included a one-time gain of 15 cents a share from an agreement last month to sell its credit card portfolio to TD Bank Group.
While increasing sales of food and having more shoppers use its discount cards has boosted Target’s revenue, those strategies have also hurt profitability. Gross margin, the percentage of sales left after subtracting the cost of goods sold, weakened in the third quarter, narrowing to 30.3 percent form 30.5 percent a year earlier.
The percentage of sales being made through its REDCard discount program, which includes Target-issued credit and debit cards, rose to 14 percent from 9.5 percent a year earlier.
Comparable-store sales rose 2.9 percent in the quarter.
Profit in the fourth quarter will be $1.45 to $1.55 a share, the company said. Analysts projected $1.50, the average of 15 estimates.
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