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Target Gross Margin Drops as Gas Prices Pare Shoppers’ Budgets

May 18 (Bloomberg) -- Target Corp., the second-largest U.S. discount retailer, posted a decline in first-quarter gross margin as rising gas prices curbed shopping trips and spending on discretionary items.

Gross margin, the difference between sales and cost of goods, narrowed 0.9 percentage points, the Minneapolis-based company said today. Net income climbed 2.7 percent to $689 million, bolstered by increased profits at the credit card unit, surpassing analysts’ estimates compiled by Bloomberg.

Retail gasoline prices have climbed 28 percent this year, prompting some customers to pare budgets as economic growth ebbs. While Chief Executive Officer Gregg Steinhafel squeezed profit growth from the credit-card business, the division could be sold as soon as this year. The unit accounted for 2.2 percent of overall revenue and 28 percent of Target’s net income.

“If you operate from a standpoint that the credit card business is going to be sold later this year, what are you left with?” said Brian Sozzi, an analyst for Wall Street Strategies Inc. in New York. “You are left with a retail business with a gross margin that isn’t stabilizing.” Sozzi recommends buying the shares.

Target fell 82 cents, or 1.6 percent, to $49.96 at 4:01 p.m. in New York Stock Exchange composite trading. The shares have dropped 17 percent this year compared with a 2.3 percent gain for Wal-Mart Stores Inc., the world’s largest retailer.

Bad Debt Expenses

The credit-card business performed better than expected, helping to counter softer-than-anticipated sales, Steinhafel said today on a conference call.

Expenses for bad debt declined to $12 million from $197 million a year ago, helping boost profit in the credit card unit 75 percent to $194 million. Revenue in the unit declined 18 percent to $355 million.

Target has boosted sales through its REDCard, which offers a 5 percent discount off purchases, and adding PFresh food departments to stores. The two initiatives added more than a percentage point to same-store sales, which rose 2 percent last quarter.

“In the retail segment, driving sales continues to be our biggest challenge and number one priority,” Steinhafel said. Health-care products and food sold well during the quarter while electronics and home products struggled, he said.

Price Increases

Same-store sales are likely to improve throughout this year, Chief Financial Officer Douglas Scovanner said on the conference call. Those gains may come as Target raises prices in apparel and home goods to make up for higher fabric and oil prices, the company said.

Wal-Mart, based in Bentonville, Arkansas, said yesterday that sales at U.S. locations open at least a year dropped for an eighth straight quarter. Customers are making fewer trips to stores because of the increase in fuel prices, U.S. stores chief Bill Simon said.

Target is vying with dollar stores, as well as Wal-Mart, for cash-strapped customers. Confidence sank to a six-week low last week, again because of escalating fuel costs, according to the Bloomberg Consumer Comfort Index.

Steinhafel is looking beyond Target’s home turf to spur sales growth, with plans to open 150 sites in Canada by 2014. The expansion, the retailer’s first outside the U.S., may eventually help push sales past $100 billion, Target said in February. The company separately reported its Canadian segment for the first time today, citing $11 million in start-up expenses. Wal-Mart entered Canada in 1994 and has more than 300 stores there.

To contact the reporter on this story: Matthew Townsend in New York at; Cecile Vannucci in New York at

To contact the editor responsible for this story: Robin Ajello at

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