Target’s Q2 Profits Slide 6.3%, Beats Expectations

“Second quarter earnings were stronger than expected due to very strong operating margin in our retail segment, and credit card segment performance in line with expectations” said Gregg Steinhafel, chairman, president, and chief executive officer. “Looking forward to the second half of the year, we are focused on initiatives to drive incremental traffic and sales in our stores while maintaining disciplined execution in both of our business segments.”

Retail Segment Results

Sales decreased 2.7% in the second quarter to $14.6 billion in 2009 from $15.0 billion in 2008, due to a 6.2% decline in comparable-store sales partially offset by the contribution from new store expansion. Retail segment earnings before interest expense and income taxes (EBIT) were $1,064 million in the second quarter of 2009, a 3.1% decrease from $1,098 million in 2008.

Second quarter gross margin rate increased to 31.9% from 31.2% in 2008, due to gross margin rate improvements within categories, partially offset by the unfavorable mix impact of faster sales growth in non-discretionary lower margin rate categories. Second quarter selling, general and administrative (SG&A) expense dollars were 0.4% lower than 2008, benefiting from productivity improvements that more-than-offset the expense of operating additional stores in 2009. At quarter-end, the company was operating 71 more stores than a year ago.

Credit Card Segment Results

Average credit card receivables in the quarter decreased $150 million, or 1.8%, from the second quarter of 2008, and quarter-end receivables decreased $349 million, or 4.0%, from the same period a year ago.

Credit card segment profit in the quarter declined to $63 million from $74 million last year as a result of Target's reduced investment in the segment and lower floating interest rates, partially offset by improved portfolio performance. Target's pretax return on invested capital (ROIC) from its investment in the credit card segment increased to 8.8% in the second quarter from 8.2% in 2008.

Net write-offs in the quarter were $304 million, in line with expectations. The allowance for doubtful accounts was $1,004 million at quarter-end, compared with $1,005 million at the end of the first quarter.

Other Expenses

Net interest expense for the quarter decreased $22 million from second quarter 2008 to $194 million, reflecting a lower average portfolio interest rate combined with modestly lower average debt balances.

The company's effective income tax rate for the second quarter was 37.9% in 2009, up from 36.8% in 2008, primarily due to the favorable resolution of specific tax uncertainties in 2008 that did not recur in 2009. For the full year, the company now expects an effective income tax rate in the range of 37.0 to 38.0%.

At quarter-end, the company operated 1,719 Target stores in 49 states.