Target Booms as Banker

Minneapolis — Helped by a 4.6% gain in same-store sales and a big 63.0% jump in income from its increasingly important credit-card operation, Target Stores Corp. drove third-quarter profits up by 16.2%, to $506 million from $435 million last year.

Merchandise sales climbed by 10.9%, to $13.2 billion, while credit-card revenues climbed almost twice as fast, by 20.7%, to $414 million from $343 million during the same period a year ago. The acid-test gauge of same-store sales climbed by 4.6% in spite of a persistently tricky retail environment, blowing past the skimpy 1.5% increase at Wal-Mart U.S. stores, or the 0.7% dip at Kmart Stores.

A major factor in the retailer's income growth, since getting into the business, has been its rapidly growing credit-card business. Credit-card sales climbed by almost 21%, to $414 million during the quarter, while profits it made from its banking business soared higher by 63%, to $176 million. Showing just how important that business has become to Target, credit cards accounted for about 13.1% of the retailer's total operating profit,while contributing only 3.1% to sales.

Making it abundantly clear that banking is vastly more profitable to Target than its core retailing business, credit cards generated an operating profit of $176 million during the third quarter, compared with $414 million in sales. That means that wearing its bankers' hat, Target made almost one dollar in pure profit, even after bad debt expenses, for every two dollars in sales — or 43 cents in profit, for every single dollar it lent out.

Elsewhere, Target's costs climbed somewhat faster than its margins during the third period. Operating costs increased moderately, by 50 basis points, or five-tenths of a percentage point, to 24.0% of sales from 23.5% a year ago. At the same time, margins improved a smaller 10 basis points, or one-tenth of a percentage point, to 32.4% from 32.3%.

Bolstering its bottom line by putting a cap on stockpiles, and forcing the cost of producing and holding the goods back on its merchandise suppliers, Target increased inventories at a far slower pace than sales, by just 4.1%, to $7.8 billion, less than half the 10.9% rate of growth in sales.