Target Corp. posted an 11 percent increase in fourth-quarter profits, the Minneapolis-based retail giant reported Thursday.
The nation's second-largest discount retailer was helped by surging grocery sales, some tax benefits and a jump in earnings in its credit-card business.
The retailer's net income was $1.04 billion for the three months ended Jan. 29. Per share earnings were just a penny under Wall Street's expectations.
"FOCUSED ON VALUE"
Kathryn Tesija, Target's executive vice president of merchandising, said the the fourth quarter was indicative of a new economic reality -- consumers are quite responsive to price cuts, known in the industry as "promotions."
"Today's consumer is focused on value and this was clearly evident this past holiday season," she said. "Not only did promotions affect the timing of sales within the quarter, a higher than expected percent of overall holiday sales were from items on promotion."
Tesija said in some cases, retail prices will have to rise to offset higher costs for fabric and food commodities. But she said Target is trying to mitigate any increases for consumers, who are still worried about the economy and their financial well-being.
"Consumer optimism is once again increasing and close to where it was in the first quarter of 2010," she said. "Even so, guests are telling us they are still risk averse. They're concerned about losing their jobs and focused on controlling household budgets."
PROFITS UP FROM CREDIT-CARD BUSINESS
Target customers did a good job in the quarter keeping up with the payments they owe on the retailer's credit cards.
Profits in that segment of Target's business rose 287 percent to $151 million compared to the same quarter last year. Bad debt expenses dropped by about $200 million.
With credit card profits up, Target is eager to sell the credit card business -- a plan the company announced earlier this year as a way to help fund its expansion into Canada.
Edward Jones retail analyst Matt Arnold expects Target will cut a deal that gives it a share of future credit card profits.
"They can either get a bigger piece now and share less in the profits or vice versa," he said. "But either way, we think it's a smart move for them to be evaluating this like they are."
Arnold said Wall Street doesn't like the wide profit swings credit cards operations can create for retailers.
Target executives reiterated their commitment to expanding grocery offerings and keeping prices down.
Target CEO Gregg Steinhafel told analysts that increased grocery sales and Target's planned expansions in U.S. urban centers and Canada should really pump up sales and earnings.
Steinhafel said Target expects to open 100 to 150 stores throughout Canada in 2013 and 2014.
"With the addition of Canada, our growth plans anticipate that Target sales will exceed $100 billion in the next six to seven years," he said. "And we believe we can at least double our earnings per share over that same time period."
But some analysts have doubts about Target being so successful.
Retail consultant Howard Davidowitz said Target is making lot of smart moves. But he thinks a poor economy and competition from rivals such as Aldi and the Dollar Store will eat into the growth of Target's sales.
"They're not as robust as they forecast," he said. "And they're not as robust as I think they ought to be. And they're not as robust as Target and the analysts expected."
Still, Target's recent results stand in stark contrast to those of arch-rival Wal-Mart. For the past year, Wal-Mart has seen fewer customers coming into its stores, as they shop at rivals like Target.
This week, for its stores in the U.S., Arkansas-based Wal-Mart reported a seventh straight quarterly drop in stores open at least one year -- a key measure of a retailer's health. Target's same-store sales, meanwhile, have increased for five consecutive quarters.