Target Earnings Climb 12% but Miss Forecasts

Discount retailer Target Corp. said Monday that fiscal first-quarter profit rose 12%, but the results narrowly missed Wall Street estimates and its shares closed 4.2% lower.

Investors were spooked as profit margins shrank and selling and administrative expenses rose faster than sales.

Target, the nation’s second-largest discounter behind Wal-Mart Stores Inc., said it earned $554 million, or 63 cents a share, for the quarter ended April 29, up from $494 million, or 55 cents, a year earlier.

But the latest results fell a penny a share short of the estimate of analysts polled by Thomson Financial.

First-quarter revenue rose 12% to $12.86 billion from a year earlier. But selling, general and administrative expenses grew 15% to almost $2.9 billion. That can make investors nervous because it suggests that a company might be spending more on advertising and salaries to attract the same level of sales.

The company’s shares, after touching a 52-week low of $48.10, closed at $50.02, off $2.19.

Chief Financial Officer Doug Scovanner said the extra expense was because Target opened three distribution centers during the quarter and remodeled more stores than usual. And he said Target’s gross margin for the full year would probably be as good as last year’s 31.9% of sales or better.

He maintained Target’s guidance for the year, saying analyst estimates that it would earn 69 cents a share for the second quarter and $3.11 for the full year “appear reasonable, given our current outlook.”

“On balance, our first-quarter performance gives me even greater confidence than 90 days ago in our ability to generate a mid-teen percentage increase in 2006 earnings per share,” he said.

Analysts polled by Thomson Financial were expecting earnings per share for the year of $3.12 a share.

For the quarter, Target said, profit grew on the strength of store revenue and contributions from its credit card business, which added $162 million to earnings before taxes; that was an increase of $60 million, or almost 60%, from the same period last year.

The retailer has carved out a spot for itself by carrying cheap-but-trendy merchandise, but it has recently faced pressure from rival Wal-Mart, which is expanding into trendier fashion and home accessories. Wal-Mart is set to report first-quarter results today.

Target President Gregg Steinhafel, however, said he remained unfazed by Wal-Mart’s strategy, noting that he had seen “just limited amounts of upscaling” going on at Wal-Mart’s home division and “slight upscaling in apparel.”

A.G. Edwards & Sons analyst Robert Buchanan said Target’s earnings miss was little more than a speed bump.

“I think we’ll see them get back on the road beginning with the second quarter,” he said.

Still, Buchanan said, he has been bothered by the frequency with which he sees Target merchandise out of stock. He said he had visited stores in five cities around the country in the last month and often saw empty shelves where merchandise should have been. He called that a problem because of missed opportunities for sales at full price.

“It hurts your sales, it hurts your margins. It upsets your customer,” he said. “That’s killing them.”