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Apparel Helps Target Hit an Earnings Bullseye in Third Quarter

Target Corporation (TGT) reported third quarter 2015 sales Wednesday that exceeded analyst estimates and raised its full-year forecast on an upbeat holiday outlook and a continued increase in store traffic. Its earnings were on target with Wall Street expectations, the first time in a year that the Minneapolis-based discounter didn’t beat them.

Sales were $17.6 billion, a 2.1% increase over the prior year period, driven by a 1.9% rise in comparable store sales and healthy revenue from new stores, but a slowdown compared to the first and second quarters of 2015. Comparable sales in signature categories (Style, Baby, Kids and Wellness) grew more than 2.5 times faster than the company average. The retailer cited baby’s and children’s apparel as standout performers in the quarter. E-commerce sales grew 20 percent and contributed 0.4 percentage points to comparable sales growth.

“We’re pleased with our third quarter financial results, as both sales and adjusted earnings per share were near the upper end of our expectations,” said chairman and CEO Brian Cornell. “Target’s sales growth continues to be led by our signature categories: Style, Baby, Kids and Wellness.”

Gross margin edged down by 10 basis point to 29.4% of revenue, as a favorable merchandise mix and the comparison to last year’s intense promotional markdowns were offset by the impact of investments in quality and innovation on the company’s owned and exclusive brands.

Earnings per adjusted share were $0.87, 8.5% above last year, and in line with analyst expectations.

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Based on its upbeat forecast for fourth quarter, the company now expects full-year 2015 adjusted EPS of $4.65 to $4.75, compared with prior guidance of $4.60 to $4.75.

Although the period ended Oct. 31 is the first quarter in Cornell’s tenure at the company that quarterly earnings failed to exceed estimates, it represents the fourth consecutive quarter of increased traffic, an indication that the retailer’s turnaround strategies of focusing on young families with well-styled quality home goods, apparel and other discretionary categories at value prices is working, no small feat for a $70 billion retailer, 20 percent of whose business is in apparel. The company has dramatically improved its in-stock position, and is testing RFID technology in a few of its apparel categories to gauge the effectiveness of the technology relative to the cost of implementation. Target is also trying to elevate the in-store apparel experience by improving fixtures, adding mannequins and optimizing apparel department layouts.

Cornell also said “As we look forward to the fourth quarter, our team is focused on strong execution throughout the holidays, and we are confident in our merchandising and marketing plans as we enter the most critical season of the year.”