We're all familiar with the brand advertising campaign for Target (NYSE:TGT): "Expect More/Pay Less." It's likely that when the media gurus came up with that slogan, they meant "more" in terms of the value proposition in the store -- quality, assortment, etc. But investors can just as easily apply the slogan to first-quarter operating results. Compared to archrival Wal-Mart (NYSE:WMT), Target simply delivered more across the board.
Earnings per share (EPS) of $0.55 beat analyst estimates by $0.02, and leaped 18% higher than prior-year results. Excluding results from discontinued operations in the prior year's quarter, EPS growth was even more impressive, up 30%. The company affirmed analyst expectations of 20%, or higher, EPS growth for the year, while Wal-Mart warned of further shortfalls in the second quarter.
Total revenues for the first quarter rose 12.7%, with equal increases in merchandise sales and credit revenues. Comparable-store sales jumped 6.2% on top of strong first-quarter comps last year of 7.3%. The company recorded gains in both customer traffic and average transaction.
Fool readers who follow retail are used to excuses when sales fall short of expectations. Wal-Mart blamed penny pinching by customers who are a little short of cash because of higher gas prices; the company also blamed wet, chilly spring weather. No excuses from Target! The company pointed to strength in women's apparel, consumables, entertainment, and pharmacy.
Margins were up 67 basis points, a result of initial markup gains and improvement in shrinkage. SG&A expenses were up 41 basis points, partially offsetting the margin improvements. Interest expense was favorable -- a result of debt reduction brought about by proceeds from the sale of the Mervyn's and Marshall Field's stores last year.
Credit operations for Target were solid, with pre-tax contribution climbing 28%. Receivables grew at a slightly slower pace than sales, a sign that delinquency rates are under control. The company has employed a duration matching strategy on its debt and credit card receivables -- a complicated way of saying that as interest rates rise, higher interest expense will be offset by higher returns on the credit portfolio. A smart move.
Wal-Mart continues to gain share at a fast rate. Its domestic sales were up $4.6 billion in the first quarter, compared to a $1.3 billion increase for Target. This is simply a result of Wal-Mart opening more new stores, and growth from a much higher base. But Target has delivered better same-store sales now for six consecutive quarters. There's a lot of speculation as to why. Certainly the weather has nothing to do with it, and I don't believe that higher gas prices are involved, either.
Target is getting into the customer's head better. Its trendy merchandise has a growing appeal to customers who define value as more than low price. A simple, but penetrating example is Target's introduction of "Isaac Mizrahi" designer label pet couture. The company is now growing sales in the pet department faster than rabbits can, well. make more rabbits. Granted, a small example, but multiply it across all departments in the store, and you have a company that is more in tune with the customers' price/value equation. Wouldn't your Fido prefer that his couture have a designer label on it?
Keep up on the fast-moving retail scene by reading these articles:
- Upscale retail is performing well so far in 2005.
- Designer labels can also be tasty.
- How to get more of that lovin' feeling.
Or talk about the company's latest moves at our Target discussion board.
Fool contributor Timothy M. Otte outfits his golden retrievers in style. He owns shares of Wal-Mart, and welcomes comments on his articles. The Fool has a disclosure policy .
