NEW YORK (AP) - Target is the latest company to learn the new retailing reality: If you discount it, they will come.
The cheap chic discounter on Wednesday reported its biggest increase in quarterly sales since before the recession began with the help of a 5 percent discount for customers who use its branded credit and debit cards.
The results come a day after its larger rival Wal-Mart posted its first quarterly gain in more than two years in revenue at its U.S. namesake stores that have been open at least a year.
Target's results point to the new bargain-based shopping habits of U.S. consumers. Americans are spending again after cutting back for the past few years, but only when there are big discounts and other incentives to be had. Consumers also are making fewer trips to stores, which means retailers have fewer chances to woo them. In this new environment, Target's discount is proving a powerful way to lure shoppers into stores, including for high-profit merchandise like clothing.
"Target is gaining a lot of momentum," said Marshal Cohen, chief industry analyst with market research firm The NPD Group. "If the prices are already good, and you get another five percent discount, why not?"
The 3.7 percent profit increase Target Corp. reported Wednesday was better than analysts expected. It was fueled by a 4.3 percent gain in revenue at stores open at least a year - a key indicator of a retailer's health - the largest increase the retailer has posted since the second quarter of 2007.
The results bode well for Target, which built its reputation as a purveyor of inexpensive fashions and home goods but took a hit during the economic downturn because 40 percent of its sales actually come from essentials like groceries.
Shoppers also didn't perceive they were getting the best prices at Target. To fight back, the company expanded its food offerings and emphasized low prices in its advertising. But that cost it some cachet. Its latest performance suggests it is regaining its footing as it heads into the busy holiday shopping season.
The Minneapolis-based company said its expanded offering of food, including fresh produce, is helping by bringing in more customers.
During the third quarter, the discounter remodeled 133 locations, resulting in a total of 875 general merchandise stores with expanded fresh food departments. That's about 50 percent of its general merchandise stores in addition to the 252 Super Targets, which already feature fresh food departments.
Also helping to boost results was continued improvement in the company's credit card business. Target said Wednesday that its credit card division set aside $40 million to cover defaults during the third quarter, down from $110 million a year earlier.
That helped the retailer earn $555 million, or 82 cents a share, in the three months that ended Oct. 29, compared with $535 million, or 74 cents a share, a year earlier. Revenue rose 5.4 percent to about $16.1 billion. Analysts had been expecting earnings of 74 cents a share on revenue of 16.31 billion, according to FactSet.
"These efforts are really working, driving traffic increases in an environment where we would otherwise expect traffic to decline," said Kathy Tesija, executive vice president of merchandising during a conference call. "While we expect guests to continue to spend cautiously, as we head into the important fourth quarter, we are confident we have the marketing and merchandising plans in place to make us the top shopping destination."
She noted that clothing enjoyed strong sales
Target's rebound has been somewhat shaky, though. For one, the biggest drivers of its growth - food and the card discount - eat into profits. Still, its overall profit margin was 30.5 percent, slipping only slightly from 30.6 percent a year earlier.
Also, holiday toy sales have had a slow start. The company told analysts shoppers may be waiting to get what they think will be better deals later. The company said Wal-Mart's new layaway program for toys and electronics, which started Oct. 17, also could be having an impact.
Target also has endured some public relations nightmares related to several outages on its website, starting with the well-publicized launch of a limited collection from Italian designer Missoni. But Tesija assured analysts Wednesday that it's quickly implementing "hundreds of fixes that will elevate the guest experience and enhance stability."
For the fourth quarter, Target expects to earn $1.43 to $1.53 per share. Analysts expect $1.47 per share.
Target's shares fell 24 cents Wednesday to close at $52.94 and slipped another 4 cents after hours.