At Target Corp., profit up 29%

In another sign that consumers are wiggling their toes again after 18 months in a spending freeze, Target's shoppers are starting to spruce up their homes, update their closets and toss small indulgences into their shopping carts.

Sales of those high-margin goods helped boost Target Corp.'s first quarter net income by 29 percent, the Minneapolis-based retailer said Wednesday. Profits were $671 million, or 90 cents a share.

Target CEO Gregg Steinhafel struck a cautious tone, however, saying that consumers and the economy remain "unstable and fragile."

"There's going to be good months, bad months and some ups and downs," he told analysts in a conference call.

Target's gains come as Wal-Mart's shoppers go elsewhere, as they feel less tied to the deep discounts that helped them weather the Great Recession.

Wal-Mart Stores Inc. reported this week that sales at stores open at least a year fell 1.1 percent in the first quarter. Target, meanwhile, said its same-store sales rose 2.8 percent in the period -- the largest increase in 10 quarters. Several other retailers recently posted quarterly same-store sales gains, including Lowe's, Home Depot and the parent company of T.J. Maxx.

"Wal-Mart did attract some of the middle-class, prototypical Target customers, especially at the lower end of Target's demographic range," said Stan Pohmer, a Twin Cities retail consultant. "Losing them is very much a concern. It's not coincidental that at the same time Wal-Mart announced that their numbers ain't so rosy, they announced another round of [price cuts] in the food category."

Jeffrey Klinefelter, an analyst with Piper Jaffray & Co. in Minneapolis, said that as the economy shows signs of recovering, Target has a "clear competitive advantage" over Wal-Mart and other discounters.

"There's a lot of crossover traffic between Wal-Mart and Target at any given time," he said. "In the most challenging [economic] cycles, Wal-Mart draws in those cross shoppers with their pricing message. ... At this stage of the cycle, Target's mix of discretionary products gives it a clear advantage in margin impact and in store traffic."

About 40 percent of Target's sales come from home and apparel. Including consumer electronics and video games, more than 50 percent of sales come in discretionary categories that bring more profit than groceries and other household staples, Klinefelter said.

Target reported that its gross margin rate was 31.3 percent in the quarter, up from 30.8 percent the same time last year.

With the housing market in the doldrums, homeowners "have begun to indulge in small ways," such as buying new sheets and bath towels, said Kathee Tesija, Target's vice president of merchandising.

Target continues to sink more money into remodeling stores than building them. It will open just 13 new stores this year, including its first Manhattan store, which is scheduled to open in Spanish Harlem in July. But it remodeled 96 of its non-SuperTarget stores during the quarter -- more than it typically does in a year -- with another 240 to go before the holidays. The changes can include an expanded grocery section with fresh meat and produce, and an overhaul of consumer electronics, beauty and shoes.

Profits in Target's credit card portfolio are improving as forecasts show fewer delinquencies and decreasing write-offs from bad debt.

Target said earnings forecasts of 91 cents per share in the second quarter and $3.81 per share for the year are "reasonable."

The stock ended the day essentially flat, at $54.03.