Profits exceed estimates at Target

MINNEAPOLIS — Profits at Target grew 10.2% to 82 cents in the third quarter, compared with 74 cents the prior year, thanks to healthy sales growth and ongoing improvement in the company’s credit card business.

It was an impressive performance, as the company had forecast earnings per share would fall in a range of 70 cents to 75 cents, and analysts’ consensus estimate was 74 cents. The underlying strength of the quarter is more impressive if one-time tax gains from the prior year and expenses related to the start-up of operations in Canada are removed from the equation. Target’s third quarter 2010 results were aided by a 6 cents per share tax benefit, while this year’s third-quarter results were negatively affected by expenses of 5 cents per share from cost related to the Canadian market entry where the retailers first stores aren’t due to open until 2013. Excluding these variables, adjusted earnings per share increased 28% to 87 cents, compared with 68 cents.

Target chairman, president and CEO Gregg Steinhafel said the company was very pleased with results that reflect strong performance of its U.S. retail and credit card businesses and that it has the right strategy and team in place to drive results.

Sales at the company stores increased 5.4% to $16.1 billion, compared with $15.2 billion the prior year, and same-store sales grew at 4.3%. The top-line growth translated to operating profits for the division that increased 14.1% to $931 million compared with $816 million. The company also reported that its gross margin rate declined to 30.5% from 30.6%, but expenses declined more significantly, dropping to 21.4% from 21.8%.

The company’s credit card segment also contributed to profits. Although the volume of receivables declined 9.9% to an average of $6.2 billion, the credit quality of the individuals who owe that debt is better, which means Target’s bad debt expenses declined to $40 million in the third quarter, compared with $110 million the prior year. As a result, the credit card segment’s operating profit increased 10% to $143 million, compared with $130 million.