Recently, Target Corporation (TGT), the operator of general merchandise and food discount stores in the United States, posted better-than-expected sales results for the four-week period ended January 28, 2012, outshining the analysts’ expectation of an increase of 2.1%.
Moreover, this also compared favorably with the prior-year period as Target registered an increase of 4.3% in comparable store sales for January 2012 compared with a rise of 1.7% in the prior-year period. Year-to-date, comparable store sales increased 3% compared with 2.1% growth in the prior-year period.
As per management, January sales were near the high end of the company’s expected growth range of low-to-mid single digit, reflecting increase in average transaction size coupled with a rise in comparable store transactions. The results were driven by strong performance of shoes, health care products and apparels.
However, in terms of performance, Target lagged behind its peer Costco Wholesale Corporation (COST), which marked an increase of 8% in comparable store sales during the period under review.
Minneapolis, Minnesota-based Target Corporation announced that net retail sales for January increased 5.1% to $4,608 million from $4,383 million reported in the prior-year period. Year-to-date, sales climbed 4.1% to $68,466 million.
Earlier, Target halted its efforts to sell the credit card receivables portfolio momentarily as it failed to find a potential buyer for its card receivables portfolio on appropriate terms. Thus, the company expects the transaction to take place late this year or in early 2013.
Further, Target promised to pay $2.8 billion to Chase Card Services – a subsidiary of JPMorgan Chase & Co. (JPM) – to retire the receivables financing received in 2008.
As per Target, the payout along with a premium, will negatively impact the fourth-quarter 2011 earnings by about 8 cents per share. With lower interest expense in 2012 and 2013, the company expects to recover some or all of the cost of the premium paid.
Last quarter, the Credit Card segment’s revenue tumbled 8.2% to $348 million. However, Target was quick to indicate that the segment profit rose to $143 million in the quarter from $130 million delivered in the prior-year quarter driven by a decline in bad debt expenses.
We believe that sticking on to the business might bring in financial crunch for the company as the requirement of bad debt provisions would be higher, reflecting reduced growth capital for future expansions.
Consequently, Target holds a Zacks #4 Rank, which translates into a short-term ‘Sell’ recommendation. However, considering the fundamentals, we have a long-term ‘Neutral’ rating on the stock.
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