Discount-store operator Target Inc. (TGT) reported an 18% increase in profit for the third quarter on Tuesday, helped by improved profitability in its retail and credit card businesses.
However, Target plans for a highly promotional holiday season, suggesting Wal-Mart's biggest rival will resort to deep discounts in effort to drive traffic to its stores.
Earnings per share for the quarter grew 18.6%, and topped analysts' expectations by eight cents, and quarterly revenues beat consensus estimate by a whisker.
Consumer spending has declined sharply since the financial meltdown intensified last year. Shoppers, worried about their shrinking retirement funds and job security amid massive layoffs, are now focusing only on purchasing the basics in the uncertain economic climate.
In a statement, chairman, president and chief executive officer, Gregg Steinhafel said, "We're very pleased with our third quarter earnings performance, which reflects strong execution and a commitment to continued innovation by teams throughout the company. Profitability in our retail segment during the third quarter was well above expectations, and credit card segment profitability also improved due to continued thoughtful portfolio management in a challenging credit environment."
Third Quarter Results
The Minneapolis, Minnesota-based retailer posted net earnings of $436 million or $0.58 per share for the third quarter, up about 18.5% from $369 million or $0.49 per share in the prior-year quarter.
On average, 20 analysts polled by Thomson Reuters expected the company to report earnings of $0.50 per share for the third quarter. Analysts' estimates typically exclude special items.
Total revenues for the quarter edged up 1.1% to $15.28 billion from $15.11 billion in the same quarter last year, and topped seventeen Wall Street analysts' consensus estimate of $15.25 billion by a whisker.
Peer Performance
Target's larger rival, Bentonville, Arkansas-based Wal-Mart Stores, Inc. (WMT) reported last week a 3.2% increase in profit for the third quarter, helped by productivity initiatives and efficient inventory management at the U.S. segment. Net income was $3.239 billion or $0.84 per share, up from $3.138 billion or $0.84 per share last year. quarter revenues increased to $99.411 billion from $98.345 billion. Quarterly net sales grew to $98.667 billion from $97.619 billion last year. Meanwhile, total U.S. same-store sales, without fuel, slipped 0.4%, and with fuel, declined 0.8%.
Another rival, Issaquah, Washington-based Costco Wholesale Corp. (COST) reported in early October a 6% Year-over-year decline in profit for the fourth quarter, hurt by softness in U.S. sales, higher employee benefit costs, and weaker foreign currencies. Net income was $374 million or $0.85 per share, lower than $398 million or $0.90 per share in the prior-year quarter. Total quarterly revenues declined to $22.38 billion from last year's $23.10 billion. Net sales were $21.89 billion, down 3% from $22.63 billion last year. Comparable sales declined 5%.
Segmental Details
Retail segment sales for the third quarter advanced 1.4% to $14.79 billion from $14.59 billion recorded in the year-ago quarter, helped by new store openings. However, comparable store sales, a key measure of retailing performance that excludes the impact of new store openings, declined 1.6%. Segment gross margin edged up 20 basis points to 30.8%, helped by gross margin rate improvements within categories.
Credit card revenues for the quarter declined 7.5% to $487 million from $526 million in the year-ago quarter. Finance charge revenues edged down a million, late fees and other revenues dropped 25%, and third party merchant fees dropped 19% from last year. Earnings for credit card business climbed to $60 million from $35 million last year, boosted by improved overall portfolio performance, partially offset by the impact of lower floating interest rates. Average receivables in the third quarter declined to $547 million from $717 million a year ago.
Other Metrics
Selling, general and administrative expenses edged up 0.3% to $3.26 billion from $3.25 billion in the year-ago quarter, while credit card expenses decline 5.5% to $381 million from $403 million in the prior year quarter. Depreciation and amortization expenses totaled $537 million, an increase of 14.5% from $469 million in the comparable quarter a year ago.
Net interest expense for the quarter declined 18.3% to $191 million from last year, due to lower average debt balances, as well as lower average portfolio interest rates. The company ended the third quarter with cash and cash equivalents of $864 million, compared to $918 million at end of the prior-year quarter.
Although the recession has had a negative impact on many retailers due to reduced customer spending, Target reported a growth in its sales for the months of August, September, and October. In October, the company's net retail sales rose 2.8% to $4.54 billion, in September sales rose 1.3% to $5.39 billion, and in August sales edged up 0.1% to $4.86 billion. However, comparable-store sales for the month of October dropped 0.1%, September comparable store sales declined 1.7%, and August comparable store sales decreased 2.9%.
The company earlier had noted that its sales remained challenging, however, it continues to experience favorable gross margin performance within categories and disciplined expense control in its retail segment, as well as modestly improving risk trends in its credit card segment.
In early October, Target announced the opening of 26 new stores that would create more than 5,000 new jobs and would help support local economies and communities around the country. The company noted that of the total store openings, twenty-one locations were general merchandise stores, while the five locations were full-grocery SuperTarget stores. In late July, Target announced the opening of 23 new stores, which created 4,000 jobs.
In an October 28 research note, Citigroup upgraded its rating on Target shares to "Buy" from "Sell".
Nine-Month Highlights
For the nine-month period, the company reported net earnings of $1.55 billion, down 3.3% from $1.61 billion in the prior-year period, while earnings per share remained with the year-ago period at $2.06 per share.
Total revenues for the year-to-date period edged down 0.5% to $45.18 billion from $45.39 billion in the same period last year. Sales was marginally down 0.3% to $43.72 billion from the comparable period a year ago. Comparable store sales declined 3.9%.
Looking Ahead.......
"As we look ahead, we remain keenly focused on delighting our guests with exciting merchandise, exceptional prices and superior service during the holiday season and believe we are well-positioned to capture profitable market share," Steinhafel added.
Target noted that it remains cautious about fourth quarter performance and is planning conservatively in both business segments, in light of the current and projected economic environment and expectations for a highly promotional holiday season. The company said in early November that it is entering the holiday season with very clean inventories, and believe to be positioned to perform well in what continues to be a challenging economic environment.
In early October, the National Retail Federation or NRF forecast holiday retail industry sales to decline 1% in 2009 to $437.6 billion. While this number falls significantly below the ten-year average of 3.39% holiday season growth, the decline is not expected to be as dramatic as last year's 3.4% drop in holiday retail sales nor as severe as the 3.0%t decline in annual retail industry sales expected for all of 2009.
NRF also forecasts the majority of holiday shoppers, or 70.1%, will purchase from discounters this year, though more than half of holiday shoppers, or about 55.8%, will also shop at department stores.
Stock Quote
Earlier in the month, Credit Suisse raised its 2009 estimate for Target shares to 3.14 from 3.00, and estimate for 2010 To 3.56 from 3.50.
In Tuesday's regular trading session, TGT is trading at $48.56, down $1.74 or 3.45% on a volume of 3.55 million shares. In the past 52-week period, the stock has been trading in a broad range of $25.00 to $51.77.
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