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Shares of Target Corp. shot up toward an 11-month high Tuesday, after the discount retailer reported fiscal fourth-quarter profit that was well above expectations, as lower markdowns and lower shrink costs boosted margins.

The company said maintaining “appropriate inventory levels” helped increase profitability, as it resulted in lower markdown rates, stronger in-stock measures and reduced inventory-related costs.

The stock
surged 8.5% in premarket trading, which puts it on track to open at the highest price seen since April 25, 2023. The stock is also heading for the biggest one-day gain since it soared 17.8% on Nov. 15, when the company reported third-quarter results.

Net income for the quarter to Feb. 3 rose to $1.38 billion, or $2.98 a share, from $876 million, or $1.89 a share, in the same period a year ago. Excluding nonrecurring items, adjusted earnings per share of $2.98 beat the FactSet consensus of $2.42.

Gross margin improved to 25.6% from 22.7%, to reflect lower markdowns and other inventory-related costs, lower freight costs and lower supply-chain and digital fulfillment costs.

BMO Capital analyst Kelly Bania said gross margin came in more than one percentage point above expectations.

The company said shrink costs were also lower than last year, as continued increases in loss rates were offset by the timing of inventory accruals.

The value of inventory held at quarter end dropped 11.9% to $11.89 billion.

Total revenue grew 1.7% to $31.92 billion, above the FactSet consensus of $31.83 billion. Same-store sales, or sales of stores open at least a year, fell 4.4% to beat expectations of a 4.5% decline.

“Our team’s efforts changed the momentum of our business, further improving our sales and traffic trends in the fourth quarter while driving profitability well ahead of expectations,” said Chief Executive Brian Cornell.

Looking ahead, the company expects adjusted EPS of $1.70 to $2.10 for the first quarter, compared with the current FactSet consensus of $2.08, and expects full-year adjusted EPS of $8.60 to $9.60 versus expectations of $9.15.

Meanwhile, Target expects first-quarter same-store sales to decline 3% to 5%, while the FactSet consensus calls for an increase of 1.3%.

Stifel analyst Mark Astrachan said the quarterly results and first-quarter outlook, which implied sequential improvement, were “largely consistent with our expectations that discretionary spending intentions are improving.”

Separately, Target said it will roll out its new “Target Circle” membership program, in an effort to meet consumers “where they are,” and reignite sales, traffic and market-share gains.

Regarding share repurchases, Target said it did not buy back any shares during the fourth quarter, but it still had $9.7 billion remaining in the repurchase program that was set up in August 2021.

The stock has rallied 13.3% over the past three months through Monday, while the Consumer Staples Select Sector SPDR ETF
has tacked on 5.7% and the S&P 500
has advanced 12.3%.

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