Target Corp. targets consumers with store card discounts, food

NEW YORK — Target Corp. is counting on driving customers into its stores in the coming months with two weapons: a 5 percent discount for its store credit-card holders and an emphasis on food.

Even with those, the company offered a conservative sales outlook as a slowing economy weighs down its expectations.

The cautious view comes as Target reported a 14.3 percent in net income, as improved business in its credit card division, cost-cutting and strong demand for its stylish fashions, which carry fat profit margins, overcame disappointing sales.

The discounter drove more customers into its stores, but they spent less on each trip amid job worries. The company said its earnings the rest of the year should be in line with Wall Street forecasts, lifting shares up more than 3 percent, or $1.38 to $52.06.

“As we consider the economy and the pattern of our sales, it’s clear that the second quarter marked a change in recent trends,” Gregg Steinhafel, chairman, president, and CEO, said in during a conference call with investors Wednesday. “While no one has a clear view of the future, recent results in both our business and the economy reinforce our perspective that the current recovery will be slow and inconsistent.”

Steinhafel said even so, Target is in “a strong position” to continue to take business from rivals.

Target’s results are in contrast with archrival Wal-Mart Stores Inc., which has reported five straight quarterly declines for a key measure of revenue and continues to struggle to keep customers.

While Brian Sozzi, analyst with Wall Street Strategies, says that Wal-Mart remains the price leader, the company has stumbled in part because of errors, particularly eliminating hundreds of grocery items from its store shelves as part of a campaign to declutter aisles. Wal-Mart is scrambling to restock those items after losing some customers to Target.

Moreover, Wal-Mart’s low-income customers have been hurt the most by the economic woes. Wal-Mart said Tuesday that customers continue to have a hard time stretching their dollars to the next payday, and food-stamp use continues to rise. But Target has seen sales increases taper off since April after enjoying a surprise uptick earlier in the year.

Target’s net income was $679 million, or 92 cents per share, in the period ended July 31. That compares with $594 million, or 79 cents per share, a year ago.

But revenue came in below expectations at $15.53 billion, up 3.1 percent. Revenue at stores open at least a year rose 1.7 percent.

Analysts surveyed by Thomson Reuters expected 92 cents per share on revenue of $15.62 billion.

Target’s credit card segment enjoyed “very strong results” amid a sharp reduction in bad-debt expense compared with last year.

“Consumers remain cautious about the future and very thoughtful about how they spend their money,” said Kathee Tesija, Target’s executive vice president of marketing. “In some cases, we are seeing guests saving up and splurging on higher-ticket items that are meaningful to them.”

Sales in food and health care continued to increase rapidly, driving customer counts. Tesija noted that consumers continue to put a few discretionary items in their carts, particularly shoes and fashions. But electronics, video games, music and movies weakened noticeably.

That translated to the average customer’s total purchase shrinking 0.8 percent, but more customers came into its stores, fueling a 2.4 percent increase in transactions. Selling price per item sold was down 2.7 percent.

In April, Target began rolling out a new format in its existing stores that not only includes a new food concept, which was launched last year, but also better video game displays, more shelf lighting in the beauty section and a revamped shoe department. So far this year, Target has remodeled more than 200 stores and has more than 300 new food areas that features perishable items operating across the country. Such remodelings drove customers to shop across different categories of the store, Target said.

Target expects that revenue at stores opened at least a year to rise anywhere from 1 to 3 percent in the current quarter and be slightly more in the fourth quarter.

Target said it was comfortable with analyst estimates for 68 cents per share in the third quarter and $1.38 per share in the fourth quarter.