17.11.2008 13:25:00

Target Corporation Third Quarter Earnings Per Share $0.49

Target Corporation (NYSE:TGT) today reported net earnings of $369 million for the third quarter ended November 1, 2008, compared with $483 million in the third quarter ended November 3, 2007. Earnings per share in the third quarter decreased 13.8 percent to 49 cents from 56 cents in the same period a year ago. All earnings per share figures refer to diluted earnings per share.

"Our third quarter financial results reflect the significant macroeconomic challenges facing our retail and credit card segments,” said Gregg Steinhafel, president and chief executive officer. "As we look to this holiday season and 2009, our entire Target organization is focused on providing compelling reasons for our guests to shop at Target in these difficult times -- by delivering exceptional value, a broad assortment of outstanding merchandise and a superior store experience. In addition, we continue to drive profitable performance through our thoughtful approach to managing inventory, credit card receivables, expenses and capital investment.”

Retail Segment Results

Sales grew 1.7 percent in the third quarter 2008 to $14.6 billion from $14.3 billion in 2007, due to the contribution from new store expansion offset by a 3.3 percent decline in comparable store sales. Retail segment earnings before interest expense and income taxes (EBIT) were $772 million in the third quarter of 2008, up 7.9 percent from $715 million in 2007.

Third quarter gross margin rate increased moderately from last year, driven by increases in gross margin rates within categories, partially offset by the mix impact of faster sales growth in lower margin rate categories. Third quarter selling, general and administrative (SG&A) expense rate was flat to 2007, benefiting from continued productivity gains in stores and disciplined control of expenses across the company.

Credit Card Segment Results

Average receivables in the third quarter increased 19.4 percent to $8.7 billion from $7.3 billion in 2007. Average receivables directly funded by Target declined 27 percent in the third quarter to $3.3 billion from $4.5 billion in 2007, reflecting JPMorgan Chase’s investment in the receivables portfolio.

Segment profitability in the quarter declined 83 percent to $35 million from $202 million last year, as a result of a decline in overall portfolio performance, Target’s reduced investment in the portfolio, and a decrease in interest rates. Overall portfolio performance declined due to higher bad debt expense resulting from current period write-offs and additions to the reserve for future periods.

Third quarter segment pre-tax return on invested capital declined to 4.3 percent in 2008 from 18.0 percent in 2007.

Interest Expense and Taxes

Net interest expense for the quarter increased $58 million from third quarter 2007, due to higher average debt balances supporting capital investment, share repurchase and the receivables portfolio, partially offset by lower average net interest rates. Over the past four quarters, the company has invested $3.8 billion in capital expenditures, $4.8 billion in share repurchase and grown its accounts receivable by $1.1 billion.

The company’s effective income tax rate for the third quarter was 41.7 percent in 2008, up from 38.1 percent in 2007. For the full year, the company now expects an effective income tax rate in the range of 38.0 to 38.5 percent.

Capital Spending and Share Repurchase

In the third quarter, under the share repurchase program announced in November 2007, the company repurchased approximately 2.5 million shares of its common stock at an average price of $54.93, for a total investment of $140 million.

Program-to-date through the end of the third quarter, the company has acquired approximately 93.3 million shares of its common stock at an average price per share of $51.70, reflecting a total investment of approximately $4.8 billion.

"On an ongoing basis we evaluate our deployment of capital resources, both for investment in our business and execution of our share repurchase program,” said Doug Scovanner, executive vice president and chief financial officer. "The current environment and our financial outlook have naturally reduced our appetite for investment in our business, and we have also temporarily suspended substantially all of our share repurchase activity. At this time, we have reduced our expected 2009 capital expenditures by about $1 billion. Overall, we believe these related decisions will help to protect our liquidity and strong debt ratings as we continue to operate in a very challenging retail and credit environment.”

Miscellaneous

Target Corporation will webcast its third quarter earnings conference call at 9:30am CST today. Investors and the media are invited to listen to the call through the company’s website at www.target.com/investors (click on "events + presentations” and then "archives + webcasts”). A telephone replay of the call will be available beginning at approximately 11:30am CST today through the end of business on November 19, 2008. The replay number is (800) 642-1687 (passcode: 4010327).

Forward-looking statements in this release, including expectations for Target’s full-year 2008 effective tax rate and 2009 capital expenditures, should be read in conjunction with the cautionary statements in Exhibit (99)A to the company’s first quarter 2008 Form 10-Q.

Target Corporation's retail segment includes large general merchandise and food discount stores and Target.com, a fully integrated on-line business. In addition, the company operates a credit card segment that offers branded proprietary and Visa credit card products. The company currently operates 1,684 Target stores in 48 states.

Target Corporation news releases are available at www.target.com.

TARGET CORPORATION
 
Consolidated Statements of Operations
 

   Three Months Ended   

 

   Nine Months Ended   

 

 

 

 

 

 

 

 

 

(millions, except per share data)(unaudited)

   

Nov. 1,
2008

     

Nov. 3,
2007

    Change      

Nov. 1,
2008

     

Nov. 3,
2007

    Change  
Sales $ 14,588 $ 14,342 1.7 % $ 43,861 $ 42,132 4.1 %
Credit card revenues     526       493     6.8         1,527       1,364     12.0    
Total revenues 15,114 14,835 1.9 45,388 43,496 4.4
Cost of sales 10,130 10,035 1.0 30,332 29,147 4.1
Selling, general and administrative expenses 3,245 3,191 1.7 9,436 9,124 3.4
Credit card expenses 403 222 81.5 1,023 574 78.5
Depreciation and amortization     469       429     9.3         1,352       1,225     10.4    
Earnings before interest expense and income taxes 867 958 (9.5 ) 3,245 3,426 (5.3 )
Interest expense, net

Nonrecourse debt collateralized

by credit card receivables 60 41 45.3 126 98 29.5
Other interest expense 180 143 26.5 550 380 44.9
Interest income     (6 )     (7 )   (21.1 )       (24 )     (11 )   128.7    
Net interest expense     234       177     32.8         652       467     39.7    
Earnings before income taxes 633 781 (19.1 ) 2,593 2,959 (12.4 )
Provision for income taxes     264       298     (11.5 )       988       1,138     (13.2 )  
Net earnings   $ 369     $ 483     (23.8 ) %   $ 1,605     $ 1,821     (11.9 ) %
Basic earnings per share   $ 0.49     $ 0.57     (14.5 ) %   $ 2.07     $ 2.14     (3.4 ) %
Diluted earnings per share   $ 0.49     $ 0.56     (13.8 ) %   $ 2.06     $ 2.11     (2.6 ) %
Weighted average common shares outstanding
Basic 753.5 845.6 776.4 850.8
Diluted     756.6       851.0             780.1       856.3        
 
Subject to reclassification
TARGET CORPORATION
       
Consolidated Statements of Financial Position

 

Nov. 1,

 

Feb. 2,

 

Nov. 3,

(millions)     2008     2008     2007
Assets

 

(unaudited)

 

(unaudited)

Cash and cash equivalents $ 918 $ 2,450 $ 627
Credit card receivables, net of allowance of $765, $570 and $532 7,999 8,054 7,120
Inventory 9,050 6,780 8,746
Other current assets     2,272       1,622       1,841  
Total current assets 20,239 18,906 18,334
Property and equipment
Land 5,727 5,522 5,387
Buildings and improvements 20,454 18,329 17,211
Fixtures and equipment 4,212 3,858 3,659
Computer hardware and software 2,610 2,421 2,361
Construction-in-progress 1,320 1,852 2,524
Accumulated depreciation     (8,798 )     (7,887 )     (7,536 )
Property and equipment, net 25,525 24,095 23,606
Other noncurrent assets     1,277       1,559       1,349  
Total assets   $ 47,041     $ 44,560     $ 43,289  
Liabilities and shareholders' investment
Accounts payable $ 7,590 $ 6,721 $ 7,852
Accrued and other current liabilities 3,057 3,097 2,812
Unsecured debt and other borrowings 2,849 1,464 1,899
Nonrecourse debt collateralized by credit card receivables     -       500       1,000  
Total current liabilities 13,496 11,782 13,563
Unsecured debt and other borrowings 11,966 13,226 9,339
Nonrecourse debt collateralized by credit card receivables 5,478 1,900 1,900
Deferred income taxes 589 470 421
Other noncurrent liabilities     1,932       1,875       1,906  
Total noncurrent liabilities 19,965 17,471 13,566
Shareholders' investment
Common stock 63 68 70
Additional paid-in capital 2,725 2,656 2,636
Retained earnings 10,967 12,761 13,630
Accumulated other comprehensive loss     (175 )     (178 )     (176 )
Total shareholders' investment     13,580       15,307       16,160  
Total liabilities and shareholders' investment   $ 47,041     $ 44,560     $ 43,289  
Common shares outstanding     752.8       818.7       845.0  
 
Subject to reclassification
TARGET CORPORATION    
   
Consolidated Statements of Cash Flows              
Nine Months Ended

 

Nov. 1,

 

Nov. 3,

(millions) (unaudited)             2008       2007  
Operating activities
Net earnings $ 1,605 $ 1,821
Reconciliation to cash flow
Depreciation and amortization 1,352 1,225
Share-based compensation expense 43 59
Deferred income taxes (32 ) (72 )
Bad debt provision 751 311
Loss on disposal of property and equipment, net 33 34
Other non-cash items affecting earnings 165 82
Changes in operating accounts providing / (requiring) cash:
Accounts receivable originated at Target (389 ) (260 )
Inventory (2,270 ) (2,492 )
Other current assets (322 ) (164 )
Other noncurrent assets 5 4
Accounts payable 869 1,277
Accrued and other current liabilities (270 ) (297 )
Other noncurrent liabilities 4 58
  Other             160       -  
Cash flow provided by operations             1,704       1,586  
Investing activities
Expenditures for property and equipment (2,827 ) (3,418 )
Proceeds from disposal of property and equipment 26 53
Change in accounts receivable originated at third parties (307 ) (978 )
  Other             (179 )     (189 )
Cash flow required for investing activities             (3,287 )     (4,532 )
Financing activities
Change in commercial paper, net 1,382 578
Additions to short-term notes payable - 1,000
Reductions of short-term notes payable (500 ) -
Additions to long-term debt 3,557 3,650
Reductions of long-term debt (1,254 ) (1,254 )
Dividends paid (345 ) (324 )
Repurchase of stock (2,815 ) (1,071 )
Stock option exercises and related tax benefit 34 204
  Other             (8 )     (23 )
Cash flow provided by financing activities             51       2,760  
Net decrease in cash and cash equivalents (1,532 ) (186 )
Cash and cash equivalents at beginning of period       2,450       813  
Cash and cash equivalents at end of period           $ 918     $ 627  
 
Subject to reclassification
TARGET CORPORATION        
 
Retail Segment
                             
Retail Segment Results Three Months Ended Nine Months Ended
Nov. 1, Nov. 3, Nov. 1, Nov. 3,
(millions) (unaudited)     2008       2007     Change       2008       2007     Change
Sales $ 14,588 $ 14,342 1.7 % $ 43,861 $ 42,132 4.1 %
Cost of sales     10,130       10,035     1.0         30,332       29,147     4.1  
Gross margin 4,458 4,307 3.5 13,529 12,985 4.2
SG&A expenses (a)     3,221       3,167     1.7         9,361       9,052     3.4  
EBITDA 1,237 1,140 8.5 4,168 3,933 6.0
Depreciation and amortization     465       425     9.4         1,339       1,213     10.5  
EBIT   $ 772     $ 715     7.9   %   $ 2,829     $ 2,720     4.0 %
EBITDA is earnings before interest expense, income taxes, depreciation and amortization.
EBIT is earnings before interest expense and income taxes.
(a) New account and loyalty rewards redeemed by our guests reduce reported sales. Our Retail Segment charges the cost of these discounts to our Credit Card Segment, and the reimbursements of $24 million and $75 million for the three and nine months ended November 1, 2008, respectively, and $24 million and $73 million for the three and nine months ended November 3, 2007, respectively, are recorded as a reduction to SG&A expenses within the Retail Segment.
 
                 
Retail Segment Rate Analysis Three Months Ended Nine Months Ended
Nov. 1, Nov. 3, Nov. 1, Nov. 3,
(unaudited)     2008       2007     2008         2007  
Gross margin rate 30.6 % 30.0 % 30.8 % 30.8 %
SG&A expense rate 22.1 % 22.1 % 21.3 % 21.5 %
EBITDA margin rate 8.5 % 7.9 % 9.5 % 9.3 %
Depreciation and amortization expense rate 3.2 % 3.0 % 3.1 % 2.9 %
EBIT margin rate     5.3 %     5.0 %   6.4 %       6.5 %
 
                   
Comparable-Store Sales Three Months Ended Nine Months Ended
Nov. 1, Nov. 3, Nov. 1, Nov. 3,
(unaudited)     2008       2007     2008         2007  
Comparable-store sales     (3.3 )%     3.7 %   (1.5 )%       4.3 %
Comparable-store sales increases or decreases are calculated by comparing sales in current year periods with comparable, prior fiscal-year periods of equivalent length. The method of calculating comparable-store sales varies across the retail industry.
 
                     
Number of Stores and Retail Square Feet Number of Stores Retail Square Feet (b)    
Nov. 1, Nov. 3, Nov. 1, Nov. 3,
(unaudited)     2008       2007     2008         2007     Change
Target general merchandise stores 1,445 1,381 180,200 170,518 5.7 %
SuperTarget stores     239       210     42,220         37,022       14.0 %
Total     1,684       1,591     222,420         207,540       7.2 %
(b) In thousands; reflects total square feet, less office, distribution center and vacant space.
 
Subject to reclassification
TARGET CORPORATION            
 
Credit Card Segment
                                             
Credit Card Segment Results

Three Months Ended

  Nine Months Ended  

 

Nov. 1,

 

Nov. 3,

 

Nov. 1,

 

Nov. 3,

(millions) (unaudited)         2008       2007     Change       2008       2007     Change  
Finance charge revenue $ 366 $ 334 9.6 % $ 1,060 $ 935 13.4 %
Late fees and other revenue 123 113 9.0 352 311 13.3
Third party merchant fees         37       46     (19.2 )       115       118     (2.5 )  
Total revenues             526       493     6.8         1,527       1,364     12.0    
Bad debt expense 314 130 142.6 751 311 141.2
Operations and marketing expenses (a) 113 116 (2.8 ) 347 335 3.8
Depreciation and amortization         4       4     0.5         13       12     6.0    
Total expenses             431       250     72.7         1,111       658     68.9    
EBIT 95 243 (61.0 ) 416 706 (41.0 )
Interest expense on nonrecourse debt collateralized
by credit card receivables   60       41     45.2         126       98     29.4    
Segment profitability       $ 35     $ 202     (82.6 ) %   $ 290     $ 608     (52.3 ) %
Average receivables funded by Target (b) $ 3,272 $ 4,479 (27.0 ) % $ 4,392 $ 4,612 (4.8 ) %
Segment pretax ROIC (c)         4.3 %     18.0 %           8.8 %     17.6 %      
(a) New account and loyalty rewards redeemed by our guests reduce reported sales. Our Retail Segment charges the cost of these discounts to our Credit Card Segment, and the reimbursements of $24 million and $75 million for the three and nine months ended November 1, 2008, respectively, and $24 million and $73 million for the three and nine months ended November 3, 2007, respectively, are recorded as an increase to Operations and Marketing expenses within the Credit Card Segment.
 
(b) Amounts represent the portion of average credit card receivables funded by Target. These amounts exclude $5,473 million and $4,176 million for the three and nine months ended November 1, 2008, respectively, and $2,845 million and $2,296 million for the three and nine months ended November 3, 2007, respectively, of receivables funded by nonrecourse debt collateralized by credit card receivables.
 
(c) ROIC is return on invested capital, and this rate represents segment profitability divided by average receivables funded by Target, expressed as an annualized rate.
                             
Spread Analysis - Total Portfolio      
  Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
Nov. 1, 2008 Nov. 3, 2007 Nov. 1, 2008 Nov. 3, 2007  
Yield Yield Yield Yield
Amount   Annualized Amount Annualized Amount Annualized Amount Annualized
(unaudited)   (in millions)   Rate   (in millions)   Rate   (in millions)   Rate   (in millions)   Rate  
EBIT $ 95 4.3 % (b) $ 243 13.3 % (b) $ 416 6.5 % (b) $ 706 13.6 % (b)
LIBOR (a) 3.1 % 5.3 % 2.8 % 5.3 %
Spread to LIBOR (c)   $ 27   1.2 % (b) $ 146   8.0 % (b) $ 235   3.7 % (b) $ 431   8.3 % (b)

(a) Balance-weighted average one-month LIBOR rate

(b) As a percentage of average receivables
(c) Spread to LIBOR is a metric used to analyze the performance of our total credit card portfolio because the vast majority of our portfolio earns finance charge revenue at rates tied to the Prime Rate, and the interest rate on all nonrecourse debt securitized by credit card receivables is tied to LIBOR.
                 
Receivables Rollforward Analysis   Three Months Ended   Nine Months Ended  
Nov. 1,   Nov. 3,   Nov. 1,   Nov. 3,
(millions) (unaudited)         2008       2007     Change       2008       2007     Change  
Beginning receivables $ 8,641 $ 6,906 25.1 % $ 8,624 $ 6,711 28.5 %
Charges at Target 955 1,062 (10.0 ) 2,923 3,053 (4.3 )
Charges at third parties 2,082 2,615 (20.4 ) 6,488 6,706 (3.3 )
Payments (3,221 ) (3,299 ) (2.4 ) (10,209 ) (9,848 ) 3.7
Other             307       368     (16.7 )       938       1,030     (8.9 )  
Period-end receivables       $ 8,764     $ 7,652     14.5   %   $ 8,764     $ 7,652     14.5   %
Average receivables         $ 8,745     $ 7,324     19.4   %   $ 8,568     $ 6,908     24.0   %
Accounts with three or more payments (60+ days)
past due as a percentage of period-end receivables     5.6 %     3.8 %           5.6 %     3.8 %      
Accounts with four or more payments (90+ days)
past due as a percentage of period-end receivables     3.8 %     2.6 %           3.8 %     2.6 %      
                                     
Allowance for Doubtful Accounts Three Months Ended Nine Months Ended
Nov. 1, Nov. 3, Nov. 1, Nov. 3,
(millions) (unaudited)         2008       2007     Change       2008       2007     Change  
Allowance at beginning of period $ 661 $ 509 29.8 % $ 570 $ 517 10.4 %
Bad debt provision 314 130 142.6 751 311 141.2
Net write-offs             (210 )     (107 )   97.6         (556 )     (296 )   88.1    
Allowance at end of period       $ 765     $ 532     43.7   %   $ 765     $ 532     43.7   %
As a percentage of period-end receivables     8.7 %     7.0 %           8.7 %     7.0 %      
Net write-offs as a percentage
of average receivables (annualized)     9.6 %     5.8 %           8.7 %     5.7 %      
 
Subject to reclassification

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