Target Corp. (TGT) sales and profits fell in the second quarter, but stronger profit margins at its stores helped the cheap-chic discounter beat analysts' expectations.

Target posted net income of $594 million for the second quarter, down from $634 million last year. Earnings per share dropped 3.9 percent to 79 cents from 82 cents a year ago. Revenue was down 2.6 percent to $15.07 billion. Analysts had forecast earnings of 66 cents per share on revenue of $15.15 billion.
Sales were down 2.7 percent for the quarter and 6.2 percent at stores open at least a year. Management said new store openings boosted total sales by offsetting weaker sales at existing stores. Executives noted that Target was operating 71 more stores at the end of the quarter than at the same time last year.

Target's credit continued to be a pain in its bottom line. Profits in that area dropped to $63 million from $74 million, which is partly blamed on lower interest rates. Target's credit-card receivables dropped $349 million during the quarter below a year ago, a drop of four percent.

In this weak economy, most retailers are struggling with consumers who can afford to pay off their credit-card bills. Target set aside a $1 million allowance for bad credit-card debts at the end of the quarter, roughly flat from the quarter before.

Management credited the improved results to cost-cutting and improved margins. Second-quarter gross margin rate rose to 31.9 percent from 31.2 percent, thanks to improvement within categories, but it was offset by faster sales in non-discretionary categories with lower margins.

While Target has made its mark, thanks to designer-savvy products for the home, consumers in this weak economy are walking the aisles looking for food and household products with lower margins, not funky tops and designer teakettles. So Target has boosted its grocery items and other low-margin cheap fare to draw customers.

But as Walmart's results showed earlier, even discount-store shoppers are holding tight to the purse strings, no matter how attractive the merchandise looks.

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