With the dust settled from Target’s first-quarter earnings announcement last week, it has become quite apparent the company would not be faring well were it not for the beneficial effects of the PFresh remodeling program and last fall’s introduction of 5% REDcard Rewards.
The two initiatives combined contributed more than 1% apiece to Target’s first-quarter same-store sales increase of 2% and in essence allowed the company to avoid posting a negative comp. An overall sales increase of 2.8% pushed Target’s first-quarter sales to $15.6 billion, and the modest sales growth translated to a 9.8% increase in earnings per share of 99 cents, which was four cents better than analysts’ consensus estimate of 95 cents. Net income increased 2.7% to $689 million. Contributing to the difference in growth rate percentage between net income and earnings per share was a share repurchase program that saw the company spend $819 million to buy back 15.4 million shares at an average price of $53.32.
While PFresh, now in 550 stores and 300 more to come this year, and the REDcard Rewards program were credited with aiding the top line, it was the company’s credit card business that saved the day from an overall profit standpoint. Operating profits for the retail segment actually declined 4.2% to slightly more than $1 billion during the quarter due to PFresh remodeling costs that and the margin pressures associated with reducing prices by 5% for the 7.6% of shoppers who took advantage of the rewards program. The gross margin impact was fairly substantial with the rate dropping to 30.4% compared to 31.3%.
Conversely, the credit division enjoyed a sharp rebound in profitability. Credit card operating profits grew by 75% to $194 million as bad debt expense was virtually non-existent at $12 million compared to $197 million the prior year.