With Christmas just around the corner -- seriously, go buy things now unless you want to spend the rest of the year in line to buy a plush rutabaga -- retailers are gearing up for their busiest days of the year. But they're also exposing their weaknesses, releasing sales data and third-quarter earnings just as they announce their specials and opening hours. Today, Target (TGT 3.35%) turned in its quarterly results, and the company looks like it has a good bit of wind under its wings as it soars into the end of the year. Here's what investors need to know.
The headlines from last quarter
Target reported earnings per share of $0.96 last quarter, which was a 4% increase from a year ago. That income was generated off the back of a 3% increase in revenue along with the sale of the company's credit card business. Target said that the sale generated $0.15 per share, and had the benefit of removing the risk management side of the credit card business completely from the retailer. According to the terms of the sale, risk will now be managed by TD Bank Group (TD +1.32%) while Target continues to provide customer support for cardholders.
One of the bigger income impacts in the third quarter, which Target expects to see in the fourth as well, came from the company's expansion into Canada. This quarter, it accounted for a $0.13 impact on EPS, while the company has forecast a $0.19 drag on EPS over the course of the fiscal year.
Operating margin came in at 6.9%, which was an improvement on last year's position, which stood at 6.6% over the same period. Overall, the company met and slightly exceeded expectations, offering an upbeat Christmas forecast, and the stock crept up 2% by midday.
The future
Management had good things to say about attracting customers during the holidays, including the fact that Target's credit card was catching on well. According to the company, 14% of all sales were made on a Target REDcard last quarter, compared to 9.5% in the previous year. The company hopes that the increase is a sign of loyalty that will result in increased sales over the holidays. To further entice customers, Target is going to price-match some online retailers, including Amazon.com (AMZN +0.63%) and Best Buy (BBY 2.44%), over the holidays.
That should draw in customers, but will have an impact on the company's bottom line, as margins will be compressed. Instead of focusing on growing the bottom line, Target has made a concerted effort to increase market share and revenue. That effort has included a 5% cash back reward with its REDcard and an increase in food sales, which bring in foot traffic but generate less income. The price-matching program fits in with the company's current plan to get people through the doors.
As an additional draw, the company has teamed up with Neiman Marcus this holiday season, and the two companies will be offering cross-promotional products in their stores. While the impact on revenue likely won't be huge, the draw and the added sense of "better-than-other-box-stores" should help Target maintain its brand appeal. The company has forecast an EPS range of $1.45 to $1.50 for the fourth quarter, which puts it squarely in line with Wall Street analyst expectations of $1.50 per share.
The bottom line
Target continues to look like the most solid big-box retailer. Same-store sales grew a slow but steady 3% last quarter. That's not great, but it's better than Wal-Mart (NYSE: WMT), which only posted a 1.7% increase last quarter. I think Target will continue to be a strong business, and its Canadian expansion could give it a good boost over the next few years. Anyone looking to add a dividend-paying retailer to his or her portfolio should take a look at Target, as it continues to be a leader in this ragtag pack.
