Target (NYSE:TGT) today announced third-quarter earnings results that sent shares higher in early trading. The retailer came in to this report having posted a string of surprisingly weak quarterly results, capped by last quarter's 62% profit dive. But today's announcement gave investors a welcome break from that negative trend. The stock was up more than 7% by 11:20 a.m. Let's take a closer look at the results.

Surprising growth
Quarterly revenue and profit both solidly beat Wall Street's expectations. Target earned $0.54 per share, or slightly below last year's haul. Still, that result was much higher than the $0.47 per share that analysts had forecast. It was also above Target's own guidance provided in late August of $0.45 per share in adjusted earnings.

Even more encouraging, the company's sales growth is back in positive territory. After coming in flat for the second quarter, comparable-store sales rose by 1.2% this quarter. Wal-Mart, by comparison, managed just 0.5% comps in its fiscal third quarter. Overall, sales grew by 2.8% to $17.7 billion, which was ahead of Wall Street's expectations for a 1.7% rise.

Target's customer traffic trends continued to improve, although they remained slightly negative. Traffic was down 0.4% as compared to a 1.3% drop in the second quarter. With that result, Target has a good shot at ending its two-year customer traffic slide next quarter.

CEO Brian Cornell, who took over the company's top spot in August, said in a press release that management is "encouraged by the improving trends we've seen in our U.S. business throughout the year, and our fourth quarter plans are designed to sustain this momentum."

Profit worries
It wasn't all good news in the third quarter, though. Target's Canada business continues to struggle, for one. Sales growth was below expectations there and the segment generated another massive loss. The Canadian market cleaved $211 million out of third-quarter earnings, which was hardly an improvement over the prior year's loss of $238 million. Management said that results were again hurt by excess inventory that needed to be cleared out at reduced prices. Target has made major changes to the pricing and selection in its Canada stores, and this holiday season will show whether that strategy is paying off.

Profitability on the U.S. side of the business also slipped, with gross margin falling to 29.5% from 30% in the second quarter. That's a bit surprising given management's comments in August that promotional intensity was on the way down. If Target is seeing a more confident shopper, we'd expect to see profitability holding steady or climbing back toward the 32% margin that was common a few years ago.

Holiday outlook
Management's earnings guidance for the fourth quarter was close to Wall Street's expectations and points to a solid holiday season. Target forecast $1.18 per share in profit next quarter, or just below the $1.22 that analysts were modeling.

Cornell sounded upbeat about the retailer's chances in what's shaping up to be a brutal competitive environment. "The entire company," he said, "is energized as we approach the peak of the holiday shopping season." With the U.S. business growing again, but Canada still struggling, Target investors can share in at least some of that enthusiasm.

 

Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.