UPDATE 5-Target, other retailers beat estimates

Wed Aug 17, 2011 1:24pm EDT

* Q2 EPS $1.03 tops Wall St view $0.97

* Sees FY shr $4.15-$4.30, St view was $4.12

* Shares up 2.1 percent (Adds comments from Target, analyst; updates stock activity)

By Jessica Wohl

CHICAGO, Aug 17 (Reuters) - Target Corp (TGT.N) reported a bigger-than-expected rise in quarterly profit and forecast a more profitable year than analysts were anticipating, as its credit card business continued to grow and sales heated up with the summer weather.

Shares of Target, which has more than 1,760 U.S. stores and is getting ready to open stores in Canada, were up 2.1 percent to $50.41 in afternoon New York Stock Exchange trading after rising as much as 5.8 percent earlier on Wednesday.

Retail results are highlighting a split between middle- and upper-income shoppers, who may be waiting a bit before they buy, versus the unemployed and low-income workers struggling to make ends meet. [ID:nN1E77F08O]

"While optimism at all income levels has improved since the recession, wealthy households continue to be the most optimistic," Kathryn Tesija, Target's executive vice president of merchandising, said during a conference call.

"The 20 percent of households with the highest incomes are shopping more often and spending more, while the other 80 percent have been cutting trips and spending less," she said of retailers' experience in general.

Target's shoppers are buying closer to when they need things, so the company said it is a a bit too early to fully judge August sales that include back-to-school purchases from school uniforms to dorm-sized refrigerators.

So far, August sales are within Target's forecast of a mid single-digit increase, though slightly below the increases seen in June and July, Chief Financial Officer Douglas Scovanner said.

Target's same-store sales rose 4.5 percent in June, 4.1 percent in July and 3.9 percent in the second quarter.

BE PICKY

Target was not the only retailer reporting better-than-expected results. Wal-Mart Stores Inc (WMT.N), the world's largest retailer and Target's main competitor, said Tuesday that its profit rose more than expected. [ID:nN1E77F03P]

On Wednesday, retailers such as BJ's Wholesale Club Inc BJ.N and office supplies leader Staples Inc (SPLS.O) also reported results that surpassed expectations. [ID:nN1E77F16Q] [ID:nN1E77G01P]

Staples Chief Executive Officer Ron Sargent said he did not see a double dip in the U.S. economy, though the country is "probably more likely to stay in economic purgatory for a while longer."

Abercrombie & Fitch Co's (ANF.N) quarter was also better than anticipated, but it warned of troubles as it enters "a period of greater uncertainty," and its shares tumbled. [ID:nL3E7JH1NE]

Edward Jones analyst Matt Arnold urged investors to be more picky while investing in the retail space, identifying companies "with sustainable long-term competitive advantages."

His top retail picks include Target, Kohl's Corp (KSS.N), Staples, Nike Inc (NKE.N) and VF Corp (VFC.N).

GROCERY MARGINS

Target's move to add groceries to more stores has boosted sales but also pressured profitability, as food carries lower margins than merchandise like apparel. Still, the second-quarter gross margin decline was not too steep. Gross margin dipped to 31.6 percent from 32 percent.

"The big win was the gross margin coming in better than expected," said Rob Plaza, senior equity analyst at Key Private Bank, who had anticipated gross margin would fall to around 31.2 percent to 31.3 percent.

A 0.5 percent rise in same-store transactions was a surprise given Target's efforts to bring people in more often, such as the grocery expansion and a credit card discount program, said Janney Capital Markets analyst David Strasser.

A large part of Target's profit coming in ahead of expectations also came from the credit card business.

Target's "super-charged" profitability from credit card receivables is likely to moderate when the write-off rate settles into a more normal pattern, Scovanner said.

Target said in January that it wants to sell its credit card receivables, or the debts that cardholders owe the retailer, and talks with potential buyers are progressing.

But it wants to keep control of the credit card operations -- a key part of its marketing, as it offers a 5 percent discount to cardholders who pay with Target REDcards. [ID:nN13293279]

Average receivables declined 12.4 percent to $6.2 billion, bad debt expense plunged to $15 million from $138 million and profit rose to $171 million from $149 million.

Target earned $704 million, or $1.03 per share, in the second quarter ended July 30, up from $679 million, or 92 cents per share, a year earlier. Analysts, on average, had expected it to earn 97 cents per share, according to Thomson Reuters I/B/E/S.

Sales rose 5.1 percent to $15.9 billion.

Target forecast third-quarter earnings per share of 70 cents to 75 cents, and full-year earnings per share of $4.15 to $4.30. Analysts have been looking for Target to earn 71 cents per share this quarter and $4.12 per share this year.

The company said it would give details on its longer-term plans during a Thursday meeting with investors in New York. (Additional reporting by Dhanya Skariachan in New York and Nivedita Bhattacharjee in Bangalore, Editing by Gerald E.McCormick, Dave Zimmerman)

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