May 24, 2007 4 min read

MINNEAPOLIS (AP) – The first quarter was a tough one for many retailers, so Target’s 18 percent profit growth took investors by surprise Wednesday. Despite worries about rising gas prices and a cool, wet April keeping some shoppers away, Target managed what Wal-Mart Stores Inc. and jeweler Zale Corp. could not. It beat Wall Street expectations and predicted full-year results would be in line with analyst expectations, although it warned that growth would not be as fast during the rest of the year.

But for the moment, at least, it appears that Target’s higher-income customers are still spending in a way that other retailers are not seeing.

“At the current time, we do not see any near-term economic indications that give us an undue amount of concern, though we are certainly prepared to manage our business in a more difficult or competitive climate,” Target Chairman and Chief Executive Bob Ulrich said on a conference call.

Target shares rose 56 cents to $58.60 Wednesday after rising as high as $60.63 earlier in the day. The high for the past year was $64.74 in February.

The nation’s second-largest discount retailer said it earned $651 million, or 75 cents per share, during the quarter that ended May 5, up from $554 million, or 63 cents per share, during the quarter ending April 29 last year. Revenue of $14.04 billion was up 9 percent from $12.86 billion a year ago.

Analysts surveyed by Thomson Financial were expecting profits of 71 cents per share on revenue of $14.17 billion.

Sales at stores open at least a year, a key retail measure, rose 4.3 percent. Target made some investors nervous earlier this spring when it reported that same-store sales dropped 6.1 percent for April because an earlier Easter pushed sales back into March. But results for February and March were strong.

Target’s eye for low-priced but trendy merchandise, like Isaac Mizrahi apparel and Swell home furnishings, has helped it differentiate itself from Wal-Mart. Wal-Mart’s attempts to imitate Target’s style have fizzled, especially in apparel; on Tuesday it said it was reducing the number of stores selling women’s apparel designed by Mark Eisen, after earlier rolling back its urban-styled Metro 7 line for women.

The average Wal-Mart customer makes $40,000 a year, and 20 percent of them don’t have bank accounts, said Howard Davidowitz, chairman of New York-based Davidowitz & Associates Inc., a retail consulting and investment banking firm. Target shoppers have incomes that are closer to $60,000 and higher education levels.

“It’s an aspirational customer with a future who wants to look right,” he said.

Davidowitz said rising gas prices aren’t helping retailers, but a bigger issue is that consumers are pinched by the cooling housing market. Gas prices during Target’s first quarter averaged just 8 cents higher per gallon than during its 2006 first quarter, according to the Department of Energy.

With rare exceptions like Target and Costco Wholesale Corp., “The overwhelming majority of retail numbers I’m reading look pretty soft to me,” he said.

Even Target said that its earnings growth would be slower than the first quarter’s 18 percent over the rest of the year, in part because it pushed some new store openings into the second quarter. Analysts are expecting Target to earn $3.60 per share for the full year. “We continue to believe this estimate is within the range of likely outcomes,” Chief Financial Officer Doug Scovanner said.

Target’s credit card has been a growing part of its profits. In the first quarter, the credit card operation added $143 million to pretax earnings, up $25 million, or 21 percent, from the same period a year ago as interest rates rose.

The credit card operation has made some observers nervous because it could make Target more vulnerable in an economic downturn if delinquencies rise faster than expected. Target said it wrote off $99 million in bad debt during the quarter, up from $63 million in write-offs a year ago. Write-offs last year were unusually low because a new law prompted shaky borrowers to file for bankruptcy protection in late 2005.

Scovanner said Target has set aside money to cover a potential increase in write-offs.

A.G. Edward & Sons analyst Robert Buchanan said Target’s first-quarter profits, combined with its projection earlier this week that May comparable store sales will rise 5 percent to 7 percent, show that economic worries are overdone, at least in Target’s case.

“We’ve got a lot of Chicken Littles out there who are convinced the sky is falling, who are convinced the consumer is caving or we’re rowing into a recession, and I just don’t think that’s the case,” he said.

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On the Net:

Target Corp.: http://www.target.com

AP-ES-05-23-07 1636EDT