Target Beats Trend, Earnings Forecasts
Target Corp. surprised Wall Street on Tuesday with better-than-expected fourth-quarter and yearly earnings at a time when many others in the retail sector limped through the holiday season.
The Minneapolis-based company, parent of its namesake stores as well as Mervyn’s California stores, also said Tuesday that it will take over and remodel as many as 35 former Montgomery Ward stores. Those stores--including an unspecified number in California--will become Target stores in 2002.
The parent company’s surprises included particularly good numbers from Mervyn’s, which had a dramatic 31% gain in pretax earnings for 2000, excluding charges. Although always profitable, Mervyn’s more recently has looked like a poor-performing cousin compared with the Target stores chain, retail’s golden child.
Target stores had fourth-quarter net earnings of $552 million before charges, or 61 cents per share excluding charges, beating analysts’ average estimate of 59 cents per share, as tallied by First Call/Thomson Financial.
Shares of Target rose $1.60, up more than 4%, to close at $38 on the New York Stock Exchange.
“The quarter offered strong evidence as to why Target is not as cyclically sensitive as many have claimed and points to why investors should stay focused on Target’s growth,” analyst Richard Church of Salomon Smith Barney wrote in a note to clients. “We are firm believers in Target’s longer term potential and believe this is one of the stocks we will make the most money in over the next few years.”
For the full year, Target reported net earnings of $1.26 billion, up 6.7% from the year earlier, excluding charges. Those gains came on more than $36 billion in sales, a 9.5% increase from a year earlier.
“The quality of earnings was strong and compared favorably to Wal-Mart,” said Prudential Securities analyst Wayne Hood.
Target’s total pretax profit on sales was about $2.7 billion for the year, excluding charges. Mervyn’s, with 266 stores, reported pretax profit in 2000 rose more than 31% from 1999 to $269 million. Target’s 977 stores, which account for about 83% of profit, posted annual pretax earnings of more than $2.2 billion, up 10%. The company’s Marshall Field’s group, with 64 stores, saw profit fall 36% to $190 million.
Gains at Mervyn’s came on nearly flat sales in stores open at least a year, a time frame often considered a good measure of overall health since the figure excludes new and shuttered stores. The division had a same-stores sales gain of 0.3% for the year; Target stores reported a 3.4% rise.
For the year, Mervyn’s reported annual sales of almost $4.2 billion, a gain of about 0.2% from last year.
Bart Butzer, Mervyn’s president, said the division had to focus on improving sales margins before it could concentrate on revenue growth. Mervyn’s drove those gains, Butzer said, with smarter inventory controls, better markups and lower wholesale costs. Mervyn’s also returned to stocking more national-brand merchandise, Butzer said, and moved away from an in-house-label focus.
Those changes, Butzer said, put the division in a good position to increase sales in the months and years to come.
“Any retailer can make sales move, but the question is are you making any money while you’re doing it?” Butzer said. “When we do drive our sales, it will go to the bottom line because the profit formula is better.”
The Montgomery Ward store site acquisitions, which will ramp up Target’s growth rates in 2002, will cost the company about $700 million, including remodeling costs, according to some analyst estimates.
Adding the converted Montgomery Ward stores is a continuation of Target’s desire to create urban strongholds. In 1999, the company bought 13 sites in California from Fedco as that chain filed for bankruptcy.
Hood of Prudential estimated annual sales from the new stores at more than $1 billion.
Target also reported a February same-store sales rise of 1.5%, slightly below the company’s forecast.
In other retail news:
* Office supply chain Staples Inc. said profit before one-time items fell 21% in the fourth quarter, which still allowed the company to narrowly beat lowered Wall Street expectations. The company said its problems stem from rapid growth during a period of cooling consumer buying. The company said its income before one-time charges was $94 million, or 21 cents a share for the quarter ending Feb. 3, down from $119 million, or 26 cents per share, from a year ago. For the year, Staples earned $261 million excluding charges, down from $315 million a year ago.
* OfficeMax Inc. posted a fourth-quarter loss of $13.2 million, or 12 cents per share, compared with a Wall Street estimate of a 13-cents-per-share loss. For the year, OfficeMax said operating losses were $49.7 million, excluding charges. The company said in late January that weaker consumer spending would push it into the red for the quarter, forcing the company to shut 50 under-performing stores and cut 1,200 jobs. OfficeMax executives said Tuesday that although losses will probably grow in the current quarter, the company should be back to profitability in the second half of the year.
* Circuit City Group reported a 9% sales drop in the fourth quarter and warned of continuing slowness for the first half of this year. Because of a weakness in personal computers, the company said, sales fell to $3.18 billion from $3.48 billion a year ago; same-store sales were off by 11%. Shares in the company fell 16%, or $2.55 a share, to close at $13.39 on the New York Stock Exchange.
* Pacific Sunwear of California Inc. said net income for the fourth quarter rose 20% to $14 million, or 44 cents per share. Same-store sales for the quarter rose 5.2%. For the year, the firm reported record earnings of $39.8 million, up almost 13% over the year before, on annual sales of $589.4 million, an increase of 34.9%.
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Times wires were used in compiling the earnings wrap-up.
