Updated from 9:12 a.m. EDTShares of Target ( TGT) were outperforming the broader market after the company posted a huge increase in quarterly profit thanks to the sale of its Marshall Field's department store chain. The company was also upbeat on a conference call, listing off several new initiatives to drive growth. The company also said the Thomson First Call third-quarter earnings-per-share estimate is a "reasonable expectation." Shares of the company were lately up $2.19, or 5.4%, at $42.61. Earlier, the company said net income in the period ended Aug. 2 was $1.416 billion, or $1.54 a share, compared to $358 million, or 39 cents a share, in the year-earlier period. Results included a gain of $1.11 a share from the sale of Marshall Field's to May Department Stores ( MAY), which was finalized on July 31. The latest quarter also showed earnings from continuing operations of 40 cents a share -- which included a loss of 5 cents a share from the repurchase of $455 million in debt -- and earnings from discontinued operations of $31 million, or 3 cents a share. Discontinued operations are now Mervyn's and Marshall Field's. Total sales were up 10% at $10.56 billion, up from the prior year's $9.6 billion. Same-store sales increased 3.9%. Analysts' consensus was for a profit of 47 cents a share on sales of about $12 billion. Target said earnings before interest and taxes were $795 million, up 16.4% from the prior year's $685 million. The company's credit card division added $120 million to earnings before taxes. Gross margin in the latest quarter jumped 99 basis points, the company said, citing improvement in both merchandise mark-up and markdown rates. Selling, general and administrative expenses, however, increased 63 basis points. Target cited in part higher worker's compensation costs. Target reiterated that its July 29 announcement to sell 257 Mervyn's stores to a group of investors and Mervyn's credit card receivables to General Electric's ( GE) Consumer Finance division is still expected to close in the third quarter. Consequently, it expects to have a pretax gain of $270 million, or 18 cents a share.
In addition, the company said that while it has closed on the sale of 62 Marshall Field's stores to May Department Stores, it expects to close on the sale of nine Mervyn's stores to May in the current quarter. Target does not expect to take a gain or a loss from that transaction. Target added that it expects to have certain overhead charges as a result of the two divestitures, which might reduce future profits. But the possibility of the charges is "substantially mitigated by the fact that we will continue to perform services for and collect fees from the buyers of Marshall Field's and Mervyn's." The company expects to work with May at least through the beginning of 2005 and a relationship could exist between the company and the buyers of Mervyn's for two years or more. The company noted that the $3.2 billion it received from May was reflected in its second-quarter balance sheet and that some of the proceeds are being applied to debt reduction. The rest is in short-term securities. The company also said that under the $3 billion share-repurchase program announced in June, it bought back 11 million shares in the second quarter totaling $472 million. Based on it current stock price, Target said on the conference call that "we would intend to be quite aggressive in the market to acquire our shares in the short run." Regarding back-to-school season, Target said that it will introduce a "back-to-college" catalogue for the first time this fall. The catalogue will be distributed to students on college campuses and will include decorating ideas and a re-loadable Target gift card. In terms of other initiatives, the company said its current dollar concept, called One Spot, is performing so well that it plans to roll out the segment to more Target stores in the year. It currently has the concept in about 125 stores.
The company also recently introduced a new custom clothing concept called "Target to a T" on its Web site, Target.com. Customers can special order apparel on-line to fit their sizes and color preferences. Later this month, Target.com will also implement a custom mailing to customers, based on their previous selections. Meanwhile, at its Super Target stores, the company plans to increase the number of Shop Keeping Units (SKU) of its proprietary brand grocery items by 50%, and Target will also boost its wine offering to double the number of stores it is in now. Looking to the balance of the year, "momentum remains strong," the company said on the call. While Target backed analysts' third-quarter earnings estimate for 37 cents a share, it noted that the estimate does not include the gain of 18 cents a share the company expects to record from the sale of Mervyn's. Marshall Field's is also still expected to be roughly 3 cents-a-share accretive to third-quarter earnings, while 2 cents-a-share dilutive in the fourth quarter. Meanwhile, Mervyn's is expected to be dilutive to the fourth quarter by 4 cents to 5 cents a share and marginally dilutive in the third quarter. In the fourth quarter, however, the share repurchase program should be mildly accretive. Same-store sales in the third quarter expected up 2% to 4%. Target reiterated its August plan for flat to positive 2% same-store sales but said results in September and October combined are expected to be better than August's results.