Target Corp. boosts 3Q profits over 50%

MINNEAPOLIS — Driven by stronger sales, fatter margins and a boost from its growing credit operations, third-quarter profits at Target Corp. soared 50.2 percent higher, rising to $277 million from $185 million last year.

Net retail sales grew by 8.0 percent, to $9.9 billion from $9.1 billion last year, as gains in the core Target Stores business offset continued weakness at Mervyn's and Marshall Field's. Despite their sales declines, however, both Mervyn's and the department store group recorded solid gains in pre-tax operating profits, though not nearly on the scale of the big brother Target units.

Lifting the bottom line, in addition to the stronger sales, were substantially improved margins. Average gross margin widened by 110 basis points, or 1.1 percentage points, to 31.8 percent in the period, up from 30.7 percent the prior year. Acting as a partial offset, though, operating costs climbed higher by 50 basis points, to 23.9 percent of sales from 23.4 percent a year ago.

An increasingly important contributor to the top and bottom lines is Target's bulging credit business, with sales shooting up by 70.3 percent, to $310 million from $183 million; and pre-tax profits moving up by 10.4 percent, to $138 million from $125 million. Putting a cap on earnings in the credit business was a big increase in bad debt expense, which more than doubled from last year's levels, shooting up by 136 percent, to $118 million from $50 million, as cash-strapped consumers couldn't pay their bills.

Like other retailers, Target appears cautious about the coming Christmas season and is reluctant to build its stockpiles. Inventories actually dropped by 2.9 percent from year-ago levels, compared with the 8 percent gain in retail sales. Stockpiles were reduced by $168 million, to $5.6 billion from $5.8 billion in 2001. "For the fourth quarter, our outlook for earnings growth is modest in light of last year's strong performance," said Bob Ulrich, Target ceo.