Target Mum on Department Store Unit Talks

The retailer says it's 'premature' to discuss transactions involving Mervyn's and Marshall Fields.
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Updated from 9:18 a.m. EDT

Target

(TGT) - Get Report

does not plan to liquidate its two ailing department store chains currently on the auction block, but the retail giant offered little else about its ongoing review process during its first-quarter earnings conference call.

Earlier Thursday, the company posted a 25% increase in first-quarter earnings, beating analysts' consensus by a penny, driven by its core division and overall stronger apparel sales.

The company said during the conference call that it expects sharper increases in profitability in the first half of the year vs. the second half, and said that the First Call consensus estimate for second-quarter earnings of 47 cents a share is "reasonable." That would compare with 40 cents a share in the year-ago quarter.

The company earned $438 million, or 48 cents a share, in the quarter ended May 3, compared with estimates for 47 cents a share. A year earlier, Target earned $349 million, or 38 cents a share.

Sales rose 12.3% to $11.59 billion, with total same-store sales up 6.6% in the quarter. Sales at Target stores increased 14% to $10.1 billion. Sales at Mervyn's dropped 1.4% to $793 million, while sales at Marshall Field's increased 4% to $614 million.

Regarding its review of alternatives for its underperforming Mervyn's and Marshall Field's stores, which was first announced in March, the company said that it would be "premature to talk about transactions."

That remark put into question whether the company is currently in discussions with

Federated Department Stores

(FD)

, which said in April that it would bid for Target's Marshall Field's chain.

When asked by an analyst if liquidating one or both of the chains is an option, the company said it wants to "convey the notion that at this point in time we are not pursuing a liquidation of those two operations." Target stressed that its original language in the March statement said sales of the two chains would be considered as "ongoing businesses." Target said it will share divestiture news as it reaches milestones.

Analysts have speculated that Mervyn's could be harder to sell than Marshall Field's in part because its lower-end store setup doesn't match with most potential bidders. Wall Street has thus hypothesized that the company could sell off all or some of the division's assets.

Shares of the Minneapolis-based company were moving down 42 cents, or 1%, at $43.93 in recent Thursday trading.

Target said the latest quarter's pretax segment profit, or what it considers its core measure of profitability, increased 19.2% to $927 million, compared with $777 million last year. Pretax profit at its Target division increased 17.9% to $132 million. Pretax profit increased at Mervyn's by $15 million to $39 million and at Marshall Field's by $3 million to $22 million.

The company said its credit card operations added $166 million to pretax segment profit, up 10.2% from the prior year.

Gross margins improved due to improved markdown rates at each of its three segments, Target said.

Stronger apparel sales also helped the quarter. Target said its mix of designs, fabrics and colors are registering with shoppers and it expects to have "reasonably good" apparel sales in the rest of 2004.

Meanwhile, rival

Wal-Mart's

(WMT) - Get Report

announced worries about rising gas prices and inflation did not seem to phase Target, which noted that "mild inflation is actually good for business." In fact, top-line growth occurs, the company said, because expenses remain the same at a fixed rate. In addition, Target expects rising gas prices to be offset by its own decreased expenses, such as taxes.

The company went on to note that in the competitive marketplace, specific rates of inflation don't matter as much since rivals would be similarly affected.

However, Target does see the chance for modest inflation of about 10% on goods coming out of China in the year. The price increases may or may not be passed on to customers, the company said. In addition, Target expects that this year's deflation rate is unlikely to repeat the prior year's 4% increase in retail sales, but added that it's too early to tell.