Cautious shoppers starting to spend

  • Article by: JACKIE CROSBY , Star Tribune
  • Updated: August 15, 2012 - 9:14 PM

Target profit was flat, but there are plenty of signs of brighter days ahead for the retailer.

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Target is set to begin operating in Canada next year, and costs associated with that held earnings down a bit. But the company raised its earnings forecast in anticipation of a strong finish to this year.

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Caution remains the word, but Target Corp. offered evidence Wednesday that consumers might be coming out of their shells.

The Minneapolis retailer said back-to-school sales are off to a strong start and its shoppers are buying more discretionary goods, such as clothing and items for the home.

The retailer reported flat earnings of $704 million, or $1.06 per share, in the second quarter, as it ramps up to open stores next year in Canada. A year ago, it posted profit of $704 million, or $1.03 a share.

Without costs for the Canadian expansion, earnings were $1.12 a share, which exceeded Wall Street's expectations.

With a lineup of new offerings heading into the holiday season, including a limited-edition partnership with luxury retailer Neiman Marcus, the company raised earnings guidance on expectations of a strong finish to the year.

Target now expects earnings per share to be $4.65 to $4.85, up a nickel from earlier estimates. Analysts had been expecting $4.10 to $4.30 a share.

Shares closed at their highest mark since the start of 2008, finishing the day at $64.50, up about 1.8 percent.

Target's results offered more encouraging news on consumer spending, following a government report Tuesday that showed the largest increase in retail spending in five months during July.

Other retailers have posted solid quarterly gains, including Macy's, Nordstrom, Home Depot and the parent company of discounter T.J. Maxx and HomeGoods. Wal-Mart Stores reports earnings on Thursday.

Target's performance contained "three key attributes we like to see, " Charles Grom, an analyst with Deutsche Bank, said in a report reiterating his "buy" rating. Those three: earnings per share were higher than expected, inventory levels were "extremely well controlled," and the company raised guidance.

Grom noted that "concerns around the holidays will linger," but that Target may have easier comparisons in December because its same-store sales last year were slower than some of its competitors.

Target CEO Gregg Steinhafel told analysts that uncertainties around the November election and the financial crisis in Europe will continue to tamp down consumer confidence.

Steinhafel said he expects Target shoppers to continue to be "cautious and resilient" and to spend in "disciplined ways."

The company's strongest sales continue to come from staples, such as groceries and items off the beauty shelf. That trend has hampered profit margins during the recession, and continued to do so during the second quarter.

But Target hinted that consumers are beginning to look beyond the basics at the kind of items that make Target stand out above rival Wal-Mart -- its stylish clothing and trendy home merchandise.

Sales of men's and women's apparel grew at a pace just shy of overall sales, according to the company. Target plans to stoke interest in those higher-margin purchases even more heading into the holidays.

Next month it will open The Shops with four boutiques featuring home and apparel items, priced from $3 to $120.

The Nate Burkus home collection launches in October, followed by the collaboration with Neiman Marcus that will include fashion-house items from such names as Diane Von Furstenberg and Rodarte.

Target said it is on track with efforts to move into Canada, its first international expansion. The retailer plans to open about 125 Canadian stores in the spring of 2013, starting in the Toronto area.

The company spent about $48 million on the Canadian effort during the quarter, which cut into quarterly profit and clouded encouraging sales news, analysts said.

Overall sales were up 3.5 percent to $16.4 million in the quarter that ended July 30. Sales at stores open at least a year, a key measure of a retailer's financial health, were up 3.1 percent. The increase came as shoppers made more trips to stores and spent more money while they were there.

Steinhafel said the initial response to the July opening of the company's first three CityTarget locations in Seattle, Los Angeles and Chicago has been positive. He told analysts the retailer could open 75 to "a couple hundred" of the small, urban-focused stores.

"We're very pleased with the start out of the blocks," he said.

Target said it continues to gain market share and incremental sales from its REDcard program, which launched nationwide in October 2010. Shoppers get an extra 5 percent off purchases at the cash register and free online shipping. Target said customers with the card tend to shop more often and spend more in stores.

Target also said it is talking with "several well-qualified partners" in its hunt for a buyer for its credit card receivables portfolio. A deal could be reached by late this fiscal year or early next year, said John Mulligan, Target's chief financial officer.

Jackie Crosby • 612-673-7335

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