Target Pinches Margins

During a conference call, CFO Doug Scovanner said he expects gross margin for the full year to "match or exceed" last year's 31.9% of sales, but some Wall Street analysts expressed caution. Gregg Steinhafel, president, acknowledged disappointing home sales during first quarter and said toys, children's apparel, health and beauty aids and other consumables were among the strongest sales performers.

The hero of overall rising earnings is the company's credit card operations, which reached $162 million, before taxes and after allocated interest expense. That represents an increase of $60 million, or a 59.5% spike compared to the same quarter a year ago. This is combined with a $28-million tax benefit in first-quarter 2006, and a decline in the company's income tax rate to 37.5%. Aggregate revenue for the locally based retail chain was $12.9 billion and earnings were $554 million.

Not only is the credit card business "hugely profitable," with "generally strong absolute performance," Steinhafel said, "but it also leads guests to spend more-–often far more-–on each visit." Citing the cards' loyalty programs, he said, "It's a fabulous tool for making our guests buy more. It's a golden time to be in the credit card business."

Comp stores showed positive traffic trends during the quarter, he reported. "There was growth in the average ticket." The growth came from more units per transaction, rather than from higher-ticket merchandise.

Target opened 25 new stores during first quarter, one of which was a SuperTarget. That took the total to 1,418 units in 47 states. Plans call for similar expansion in second quarter with the addition of 28 new sites, including three SuperTargets.

There will be expansion of 150 existing units by early August. Increased emphasis is being added to food categories. Bath and body sections have taken on hundreds of new items from Europe, Steinhafel said, and intimate apparel sections have added more well-known department store brands. Overall, the stores are adding more of the company's own brands. Electronics departments are increasing the selection of digital products and flat panel TVs.

Asked if the chain was being impacted by rival Wal-Mart's addition of more upscale merchandise, Steinhafel said, "we really haven't seen any impact from Wal-Mart out of efforts to upscale. We've seen just a limited amount of upscaling going on in their home and slight upscaling in apparel, but it's not of any meaningful scale at this point. The marketplace continues to be highly competitive," he added. "It's rational, but like it has been for some time, it's aggressive."

During the conference call, Bob Ulrich, chairman and CEO, said he was confident "that we will continue to generate profitable market share growth." He expects "to achieve a mid-teen percentage increase in earnings per share for the full year 2006."

Following Monday's conference call, TGT common stock dropped to a 52-week low of $48.10 a share, but rose to close at $50.03 a share, which represented a 4.2% decline for the day. The 52-week high of $60 per share occurred on July 20, 2005.