Target Hits the Mark

Delinquent accounts edged upward to 3.2% from 3% a year ago, although that figure was down from 3.5% in the fourth quarter. Net write-offs, which grew steadily in 2006, remained stable at 6% in the first quarter. The allowance for doubtful accounts, which gauges bills that likely won't be paid, also remained steady at 7.7% and aren't expected to vary from those levels.

On Target's conference call, management said it expects "some modest adversity" in write-offs, which it has provisioned for. So there are fewer write-offs than expected, the company's profit margin should benefit.

My concerns about credit cards haven't changed. While Target is managing the business well, this segment deserves close scrutiny in the future, given the volatility it faces.

On the margin side, Target did a stellar job. The company improved gross margin by 39 basis points over the year-ago period, boosted by fewer markdowns and good cost control. The company also recorded a $12 million telephone excise tax refund, which added a penny per share to earnings.

The reduction in markdowns came amid solid inventory control. Product turnover increased for the third consecutive quarter. Inventory-level growth of 5.9% was below merchandise-sales growth of 9% and square-footage growth of 7.1%.

It also helped that people bought what Target was selling. Same-store sales rose a healthy 4.3%, and they are expected to jump 5% to 7% in the second quarter.