Target Hits Accelerator

It beats on both sales and earnings.
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Updated from 9:29 a.m. EDT

Target

(TGT) - Get Report

reported better-than-expected second-quarter earnings Thursday, despite a big drop in net income from the year-ago period, when a gain from the sale of its Marshall Field's chain boosted results.

The No. 2 U.S. discount retailer behind

Wal-Mart

(WMT) - Get Report

said it earned $540 million, or 61 cents a share, in the quarter, down from $1.41 billion, or $1.53 a share, the year before when the sale of Marshall Field's boosted earnings by $1.11 a share. On a continuing operations basis, the retailer posted a 50% compared with last year's earnings of $360 million, or 39 cents a share.

Analysts on Wall Street were expecting the company to earn only 59 cents a share for the quarter, according to consensus estimates reported by Thomson First Call. Still, shares of the discounter were recently down 5 cents, or 0.1%, to $55.49.

On a conference call with analysts, the company affirmed its expectation for earnings of $1.50 a share for the second half of the year and 4% to 6% growth in same-store sales.

Wall Street analysts were expecting full-year earnings for Target of $2.64 a share.

On the top line, Target's total revenue for the quarter grew 13.6% to $12 billion, driven by a 6.7% increase in same-store sales combined with the contribution from new store expansion and the company's credit card operations.

The strong sales performance pushed the company's operating margins up by 80 basis points to 8.2%. Gross margin accounted for all of the gain, since its expense rate also rose by 40 basis points due to energy costs, local property taxes and increased direct sourcing.

"Our long-term strategy envisions maintaining, not expanding, our operating margins," said Doug Scovanner, Target's chief financial officer.

The company's credit division accounted for the majority of its upside in earnings, with a 27.5% increase in revenue. Morgan Stanley analyst Gregory Melich noted that this growth came in a quarter when management increased reserves for bad debt in anticipation of increased bankruptcy filings.

"Given the quality of this period's credit metrics, we believe Target may be in a position to reduce reserves for the balance of the year and possibly drive even stronger card profitability," Melich said in a research note.

When questioned about the impact of rising gasoline prices on sales, Target's CEO, Bob Ulrich, said there was little connection between the retailer's performance and gas prices in the near-term but that might not be the case for the long-term.

"So far, our rate of same-store sales appears positively correlated with gas prices, but I think that's a coincidence," Ulrich said.

During the quarter, the company repurchased $80 million of its common stock, as part of its $3 billion repurchase program announced in June. It acquired 1.7 million shares at an average price of $47.42 a share.