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Target, BJ's Wholesale results beat the Street

SAN FRANCISCO (Reuters) - Target Corp reported a better-than-expected profit on Wednesday as the No. 2 U.S. discount retailer offset sluggish sales by keeping a tight control on inventory and expenses, while its credit card business was profitable.

A woman shops in a Target store in Falls Church, Virginia August 19, 2008. REUTERS/Kevin Lamarque

The results showed some stability has returned to Target’s business after the recession and crumbling housing market battered profits as shoppers stopped splurging on its trendy wares or making their Target credit card payments.

In the past year, it has slashed inventory, cut costs, set aside funds to cover bad credit card accounts, and has started to tout its discount prices to appeal to frugal shoppers.

Target, which is locked in a proxy battle with activist investor William Ackman, said its business is now “less negative” than it was, and it does not see the need to put aside more money to cover bad credit card accounts.

“The earnings release reaffirms our view that Target has reached a positive inflection point in its business -- both in the retail and credit card operations,” wrote William Blair & Co analyst Mark Miller in a research note.

Miller said Target’s results also suggest that the proxy contest with Ackman has “driven heightened management focus on driving near-term financial performance.”

Target noted that demand for food was strong in the quarter, a trend also seen at BJ’s Wholesale Club, which posted a higher-than-expected quarterly profit and raised its full-year earnings forecast.

Target is testing a new food format that will offer a larger selection of frozen foods and perishable items.

Target’s shares rose 4.4 percent to $43.78 on the New York Stock Exchange at mid-afternoon.

PROFIT DROPS AT TARGET

Target’s profit fell 13 percent to $522 million, or 69 cents per share, for its fiscal first quarter ended May 2, from $602 million, or 74 cents per share, a year earlier.

The results beat Wall Street’s average forecast for earnings of 60 cents a share, according to Reuters Estimates, and mark an improvement from the previous quarter when profit fell nearly 41 percent.

Sales edged up to $14.4 billion from $14.3 billion, but sales at its outlets open at least a year, or comparable store sales, fell 3.7 percent.

Kathee Tesija, Target’s executive vice president of merchandising, said consumers are sticking to buying what is on their shopping list when they come to its stores. To save money, they are purchasing nail polish and hair color instead of going to the salon, or buying only a shirt instead of an entirely new outfit.

The retailer said it intends to make sure shoppers know its prices, especially for food, are as low as those at larger rival Wal-Mart Stores Inc, which has gained market share during the recession.

Target said its credit card segment reported a profit of $39 million, down from $181 million last year. But the results showed an improvement from the pretax loss of $135 million in the fourth-quarter.

For the second quarter, Target said earnings of 63 cents per share “seems achievable.” Analysts were expecting it to earn 64 cents per share.

BJ’S POSTS HIGHER PROFIT

BJ’s, the No. 3 U.S. warehouse club operator, said net profit rose to $24.3 million, or 45 cents per share, for the fiscal first quarter ended May 2, from $17.2 million, or 29 cents per share, a year earlier.

Analysts had forecast a profit of 43 cents a share.

“This environment has played directly in to BJ’s strength -- a low-price focus, consumers searching for value,” said Christian Andreach, a managing director at money management firm Manning & Napier Advisors.

But BJ’s shares fell 2.7 percent to $37.04, and Andreach attributed the decline to investors having come to expect strong results from the retailer.

Warehouse clubs like BJ’s, Costco Wholesale Corp and Wal-Mart’s Sam’s Club have been appealing to shoppers who want discounts on staples such as groceries and toiletries. But they are facing greater challenges compared with a year ago when high gas prices drove sales at their fuel stations.

Its quarterly sales rose 0.2 percent to $2.26 billion, but sales at clubs open at least one year fell 1.5 percent, including a 9 percent hit from gasoline sales.

BJ’s raised its per-share outlook for the full year ending January 30, 2010, to $2.44 to $2.54. That is up from an already raised forecast of $2.42 to $2.52, which BJ’s issued earlier in May. It expects second-quarter earnings of 60 cents to 64 cents a share on a GAAP basis.

Additional reporting by Aarthi Sivaraman in New York; Editing by Dave Zimmerman, Richard Chang

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