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Target Edges Past Estimates

Fourth-quarter earnings top Wall Street expectations by a penny, but the retailer sees lower margins.
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Updated from 9:16 a.m. EST



posted a 14% jump in fourth-quarter earnings, but the No. 2 U.S. discount retail chain said its gross margin expansion will slow in 2006 as it moves into lower-margin categories.

The Minneapolis-based retailer reported earnings of $939 million, or $1.06 a share, for the quarter, up from the $825 million, or 91 cents a share, it recorded in the year-earlier period. Analysts, on average, were looking for earnings of $1.05 a share, according to Thomson First Call.

Revenue for the quarter rose 11.5% to $16.95 billion from $15.19 billion in the same period a year ago. That came on a same-store sales increase of 4.2%. Analysts were looking for total sales of $16.87 billion in the quarter.

"Target produced outstanding results in 2005, surpassing $50 billion in sales and generating strong growth in earnings," the company said. "We are proud of our recent performance, remain committed to our strategic direction and believe that Target is well-positioned to continue delighting our guests and delivering superior value to our shareholders in 2006 and for years beyond."

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For 2006, the retailer expects same-store sales to rise from 4% to 6%, but the company said its gross margin rate will probably be flat, reflecting a slowdown from Target's strong profit margin expansion of recent years. On a conference call with analysts, Chief Financial Officer Douglas Scovanner said the growth will slow as the company expands into the grocery and pharmacy business, where margins are lower.

For the fourth quarter, Target reported a gross margin rate of 30.7%, up from 30%. The company attributed the gain to improvements in pricing and inventory shrinkage. Those factors were slightly offset by a higher expense rate resulting from several factors, including rising utilities expenses.

Shares of Target recently were down 75 cents, or 1.3%, to $55.05.

Earlier this week, Target tightened its February sales guidance toward the lower end of its forecast, citing the snowstorm that slammed the East Coast on the weekend. It now expects a comps gain of 2.5% to 3.5%, down from its old projection for a gain of 2.5% to 4.5%. Target reported a 5.2% same-store sales rise for January, hitting the high end of its range and beating the view of analysts.



, Target's larger rival, reported a January same-store sales gain of 4.7%. Wall Street expects the world's largest retailer to report earnings of 83 cents a share next Tuesday, up from last year's 75 cents a share.

"We expect to continue to steal market share in 2006," Target's chairman and chief executive, Robert Ulrich, said on the conference call.