Target Corp posted a quarterly profit slightly above Wall Street expectations, helped by better-than-expected holiday sales, improved margins and a lower tax rate.

The No. 2 U.S. discount retailer said its shoppers are increasingly confident and willing to buy more discretionary items, like clothes or home decor. But it said the current Wall Street estimate for its first-quarter earnings is above its own forecast.

Clearly the quarter was not a terrific quarter. They beat on the tax rate, and they gave some pretty tepid guidance, said Telsey Advisory Group analyst Joseph Feldman.

If you dig a little deeper you'll see the guidance is somewhat conservative, sales trends are starting to return ... and that's what's going to help drive earnings this year, he said.

Net income was $936 million, or $1.24 per share, in the fourth quarter ended January 30, compared with $609 million, or 81 cents per share, a year earlier.

Excluding a lower provision for income taxes, earnings were $1.17 per share. Analysts, on average, were expecting earnings of $1.16 per share, according to Thomson Reuters I/B/E/S.

Sales rose 3.7 percent to $19.72 billion. Sales at stores open at least a year, a key gauge of a retailer's health, rose 0.6 percent. Its gross margin rate increased 1.8 percentage points to 29.1 percent.

Target also said it is on track to post its third consecutive gain in same-store sales in February.

CREDIT CARD BUSINESS IMPROVES

Last year, Target's quarterly profit fell nearly 41 percent as shoppers avoided buying its trendy wares, forcing it to cut prices to clear holiday merchandise. It also lost money in its credit card segment as shoppers fell behind on payments.

Since then, Target has reduced inventory and begun touting its low prices to win back consumers who stopped shopping in its stores during the downturn. It is also renovating hundreds of stores to add more fresh food and groceries.

Target's results come less than a week after larger rival Wal-Mart Stores Inc reported higher quarterly profit, but said sales at its U.S. discount stores fell during the holiday quarter and traffic declined.

Target said sales in the holiday quarter were better than it expected, and it expects traffic and sales of discretionary merchandise to improve in 2010.

Its credit card business has also stabilized, posting a profit for the quarter of $39 million, compared with a loss of $135 million a year ago.

The retailer forecast same-store sales for its current fiscal year to be up 2 percent to 4 percent. For the 12 months ended January 30, its same-store sales fell 2.5 percent.

For the first quarter, it said Wall Street's view for earnings of 76 cents per share could be above its own middle of the road outlook.

Full-year earnings per share of $3.62 is clearly within a potential range of achievability, it said. Analysts were expecting full-year earnings of $3.64 per share.

Target shares were down 42 cents at $50.22. Wal-Mart shares were down 1 cent at $53.82.

(Reporting by Nicole Maestri, editing by Dave Zimmerman and Derek Caney)

Target