Expenses, Sales Shortfall Cut Into Target's Earnings

Updated from 9:03 a.m. EDT

The shortfall on Target's ( TGT) bottom line in the first quarter was "the direct result of softer thanplanned sales," the retailer's CFO said on a conference call Thursday. But the company also saw a rise in credit card expenses, which jumped 27.4% to $210 million year over year.

The biggest part of that increase was thecompany's provision for bad debt, which increased from $89 million in theyear-ago quarter to $130 million in the just-completed quarter.

Target's earnings were virtually unchanged from a yearago, as a jump in operating expenses offset a 7.6% rise in revenue.

The retailer earned $349 million, or 38 cents a share, on revenue of$10.32 billion in its quarter ended May 3. In the year-ago quarter, Targetearned $345 million, or 38 cents a share, on $9.60 billion in revenue.

Analysts were forecasting earnings of 39 cents and revenue of $10.43billion in the latest quarter, according to Thomson First Call.

In addition to missing analysts' forecasts, the results didn't meetTarget's own expectations, said Doug Scovanner, Target's chief financialofficer, on a conference call. Target had not released its first quarterexpectations, but Scovanner's comments echoed the company's warning in Aprilthat its results were coming in below plan.

Still, he added, "We are pleased with ourfirst quarter performance."

Analysts are expecting Target to post profits of 42 cents a share in itssecond quarter. While that target is "clearly within reach," Scovannerwarned that it was above the company's internal plan. However, Scovannersaid analysts' expectations of yearly earnings of $2.03 a share are"in-line" with Target's projections.

The company'ssame-store sales fell 0.1% in the quarter from a year ago. Same-store storesales compare results at like outlets open for more than one year. Thecompany''s overall sales increase was due in part to a growth in squarefootage of 8% year over year.

At the end of the quarter, Target had 1,494 stores spread among its Target,Mervyn's and Marshall Fields divisions, up 6% from a year earlier.

Target's gross profit margin, which represents the difference betweenwhat a company charges for its goods and what it pays forthem, declined slightly as a percentage of retail sales in the quarter.Compared with the same period a year ago, gross margin was down just 4 basispoints to 32.24% of retail sales, which excludes the company's credit cardrevenues.

While the company was able to keep its cost of goods in line, it lostground on the rest of its expenses. Target's sales, general andadministrative costs increased 9.4% to $2.33 billion. As a portion ofoverall revenue, such expenses rose 36 basis points to 22.53%.

Target, which has faced scrutiny in recent months over the health of itscredit card operation, saw its net write-offs for both its proprietary cardsand its Target Visa cards grow in the quarter as a portion of receivables.For the proprietary cards, write-offs rose to 8.2% of receivables, up from7.3% in the year-ago quarter. Meanwhile, Target Visa card write-offsincreased to 8.5%, from 2.2% a year ago.

The company attributed the increases to a seasoning of its portfolio, aswell as higher-than-expected bankruptcy filings in April.

"Our credit quality remains very good," said Gerald Storch, thecompany's vice chairman, on the call. "Overall delinquencies and write offsare within in their anticipated ranges."

Company officials said they expected Target's net write-offs andprovisions for bad debt to stabilize at around 8.5% to 9% of receivables.

Despite the increase in write-offs and the bad debt provision, Target'spretax profit from its credit card operations rose from $115 million lastyear to $151 million in the just-completed quarter. The company's grossreceivables increased to $5.68 billion in the quarter from $4.25 billion.

Besides the credit card situation, another possible dark cloud on thehorizon for the company was inventory. Target's inventory increased 8.3% inthe quarter to $4.94 billion, outpacing the company's sales and squarefootage growth.

The growth in inventory could force markdowns in some seasonalcategories, said Gregg Steinhafel, president of the Target stores division,on the call. But Target has managed inventory well, Steinhafel insisted.

"There is no fundamental markdown problem here," company officials said.

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