Sales growth was double Wall Street's expectations. But questions remain about the effect of deep discounts.
After modest increases in sales during the critical holiday shopping season, Target Corp. delivered results in January that were double what analysts had predicted.
The nation's second-largest retailer began 2012 with an impressive 4.3 percent rise in sales at stores open at least a year. Wall Street expected 2.1 percent growth for the month.
Using an array of promotions and price discounts to lure shoppers, retailers said their sales increased 4.2 percent on average from a year ago. The performance surprised analysts, who expected shoppers to scale back after the holidays.
"We already had some great sales toward the end of December, so how much were people really going to go out and purchase in January?" said Megan Donadio, a retail strategist at the consulting firm Kurt Salmon.
Several major retail chains posted solid gains in January, including Costco, the Limited and Saks Fifth Avenue. But sales decreased from a year ago at a handful of chains, and many others missed analyst estimates.
For Minneapolis-based Target, the revenue growth was a welcome change after the company reported tepid same-store sales increases of less than 2 percent in November and December. The disappointing performance took a toll, as the company sharply reduced its earnings expectations for its fourth quarter, which ended in January.
"They came out very nicely," said Stan Pohmer, a retail consultant in Minnetonka.
Same-store sales are a closely watched measure of retail performance because the statistic eliminates the highs and lows of stores that recently opened or closed. Target has 1,763 U.S. stores and will open its first Canadian stores next year.
Among big retailers, Costco Wholesale Corp. also reported strong January sales, while Macy's missed Wall Street expectations. Costco reported 8 percent growth in U.S. same-store sales once gasoline sales were subtracted, compared with the 5.4 percent Wall Street expected. Macy's said it had a 2.4 percent increase in same-store sales, but analysts had been expecting 3.5 percent.
Overall, Target's January sales reached $4.61 billion and were steady across the country, officials said. Top-performing products for Target included shoes, health care products and clothing, which helped overcome weaker sales in electronics and books.
"Sales were near the high end of our expected low to mid single-digit range, reflecting strong performance in both discretionary and non-discretionary categories," Target CEO Gregg Steinhafel said in a statement.
Whether the sales growth translates into higher profits remains to be seen, analysts said. That's because it's unclear whether the increase was generated from highly profitable new merchandise or from the discounted seasonal leftovers that traditionally carry lower profit margins.
"An increase in sales in January usually suggests clearance rather than the sale of hot new products," said Dave Brennan, co-director of the Institute for Retailing Excellence at the University of St. Thomas in St. Paul. "There are few hot new products introduced in January."
Analysts remained cautious about what the first month of 2012 means for Target and other retailers. While discounted items often generate some profit, there is enormous pressure for retailers to sell them quickly to make room for new merchandise, Pohmer noted.
"Getting rid of stuff by a certain date is important," he said.
The New York Times contributed to this report. Steve Alexander • 612-673-4553