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UPDATE 3-Target surges on same-day service boost

Aishwarya Venugopal

(Adds details, updates share movement)

Aug 21 (Reuters) - Target Corp raised its annual profit forecast on Wednesday after reporting better-than-expected quarterly results as higher investments to remodel stores and beef up digital business drew in more shoppers, sending shares up 17%.

The retailer has been adding muscle to its same-day services with initiatives like Shipt, in-store pickup and Drive-up as customers increasingly get used to faster deliveries from rivals Amazon.com Inc and Walmart Inc.

These services allow shoppers to pull into a store and pick-up their orders within minutes of placing them through the mobile app or website. The company said one out of five customers, who used its same-day service in the second quarter, were new.

Faster services also drove more than three-fourths of the 34% increase in comparable digital sales. The robust online sales accounted for more than half of the 3.4% growth in same-store sales.

Analysts on average were expecting same-store sales to grow 3%, according to IBES data from Refinitiv.

"Q2 could not have gone better for Target," Moody's vice president Charlie O'Shea said.

Target has also been building on its merchandise by adding more private label brands, redesigning about 300 stores this year and opening smaller locations in college towns and urban areas to reach a wider audience.

Earlier this week, the company said it was starting a new grocery brand, Good & Gather, that would hit stores in September.

The retailer expects the brand, which has everything from dairy and meats to ready to eat pasta, to have more than 2,000 items by the end of 2020.

Its store traffic grew 2.4%, while gross margins improved to 30.6% in the quarter, benefiting from a better assortment of its products and competitive pricing.

"The strong gross margin performance despite the slew of weather-driven markdown concerns highlights the companies balanced mix, strong execution, and scaling e-commerce strategies," J.P. Morgan analyst Christopher Horvers said.

Target said it expected full-year adjusted profit to be between $5.90 and $6.20 per share, up from the prior range of $5.75 to $6.05 per share. The outlook accounted for potential additional U.S. tariffs on Chinese imports.

Excluding certain items, the company earned $1.82 per share in the quarter ended Aug.3, beating the average analyst estimate by 20 cents.

Total revenue rose 3.6% to $18.42 billion, above expectations of $18.34 billion.

The company's stock, which have risen 29% this year, were on course to open at a record high, driving gains in other retail players and adding to broad gains for Wall Street.

Shares of Walmart and Amazon rose 1% in premarket trade and those of department store operators such as Macy's were also higher.

(Reporting by Aishwarya Venugopal in Bengaluru; Editing by Shounak Dasgupta and Arun Koyyur)