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Strong Apparel Performance Helps Target Beat Expectations in Q2

Target Corporation (TGT) reported second quarter 2015 financial results that met Wall Street revenue estimates and handily beat profit estimates.

For the three months ended Aug. 1, 2015, sales increased an expected 2.8% to $17.4 billion from $17 billion in the prior year period, driven by a better-than-expected 2.4% increase in comparable sales.

Comparable sales in signature categories Style (which includes the majority of the retailer’s apparel categories), Baby, Kids and Wellness grew by more than 7 percent in the quarter, three times faster than the company average.

Comparable sales was 4 to 5 percent in both Home and Apparel categories, with apparel showing the strongest performance in baby, kids and women’s ready-to-wear.

Digital channel sales grew by 30 percent and contributed 0.6 percentage points to comparable sales growth. About 80 percent of digital channel sales growth was driven by home and apparel. One of Target’s key strategic initiatives is to become a leader in digital, since it plays such a major role in driving store traffic.

Gross margin rose by 50 basis points to 30.9% of revenue, reflecting heightened promotional markdowns in second quarter of 2014 and a favorable merchandise mix in 2015. SG&A expense was 19.9% of revenue, compared with 20.5% in the prior year period, reflecting ongoing cost savings initiatives and expense timing.

Net income increased by 221 percent to $753 million, or $1.22 per share, up 20.6% from $1.01 in the second quarter of 2014, and easily beating analyst estimates of $1.11.

“We’re very pleased with our second quarter financial results, as traffic growth, strong sales in our signature categories and continued expense discipline drove better-than-expected profitability,” chairman and CEO Brian Cornell said. “While the momentum in our financial results is encouraging, we have much more to accomplish. Looking ahead, we are focused on making further progress against our strategic priorities and are committed to improving operations as we move through the important back-to-school, back-to-college and holiday seasons.”

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Target now expects full-year 2015 adjusted earnings per share of $4.60 to $4.75, compared with prior guidance of $4.50 to $4.65.

In second quarter 2015, the company repurchased 8.2 million shares of common stock at an average price of $81.94, for a total investment of $675 million. The company also paid dividends of $331 million during second quarter 2015, an increase of 22 percent from $272 million last year. In total, Target returned $1.006 billion to shareholders in second quarter 2015, representing more than 133 percent of net income.

During the quarter, Target Canada completed a court-approved real estate sales process that, consistent with expectations, generated $20 million in after-tax losses from discontinued operations, compared with $157 million in the prior year’s second quarter.