Target Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended August 1, 2020 (Q2 2020), not 2019 Q2 as stated in the request. Dollar amounts are in millions unless noted.
Business context and reporting period
Target operates as a single U.S.-focused retail segment, selling through stores and digital channels. The filing covers the three and six months ended August 1, 2020, compared with periods ended August 3, 2019. COVID-19 materially affected shopping patterns, category mix, fulfillment, and operating costs. All stores, digital channels, and distribution centers remained open.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $22,975 | $18,422 | $42,590 | $36,049 |
| Operating income | $2,300 | $1,324 | $2,768 | $2,458 |
| Net earnings | $1,690 | $938 | $1,974 | $1,733 |
| Diluted EPS | $3.35 | $1.82 | $3.91 | $3.34 |
| Operating margin | 10.0% | 7.2% | 6.5% | 6.8% |
| Gross margin rate | 30.9% | 30.6% | 28.3% | 30.1% |
Q2 revenue increased 24.7%, operating income 73.8%, and diluted EPS 84.4%. Comparable sales grew 24.3% in Q2, including 10.9% store-originated growth and digital sales growth of 195%; digital contributed 13.4 percentage points to comparable-sales growth. For the six-month period, comparable sales rose 17.7%. Adjusted diluted EPS, a non-GAAP measure, was $3.38 in Q2 and $3.96 year to date.
For the six months, operating cash flow from continuing operations was $5,116, versus $2,810 a year earlier; capital expenditures were $1,414. Cash and cash equivalents were $7,284 at August 1, 2020, compared with $2,577 at February 1, 2020. Current assets were $17,623 and current liabilities $15,892. Long-term debt and other borrowings were $14,188, with $109 current; the filing reports no commercial-paper balance. Shareholders’ investment was $12,578.
Material changes versus prior period
- Q2 comparable-sales growth accelerated from 3.4% in the prior-year quarter to 24.3%, led by digital demand and higher average transaction amounts.
- Digital sales represented 17.2% of Q2 sales, compared with 7.3% a year earlier. Growth was strong across categories, with comparatively stronger growth in lower-margin categories.
- Gross margin rate improved slightly in Q2, but declined year to date as digital fulfillment and supply-chain costs and category mix weighed on results.
- SG&A expense rose $548 in Q2 and $945 year to date, including approximately $400 and $600, respectively, in incremental team-member pay, benefits, and health-and-safety costs. Strong sales growth reduced SG&A as a share of revenue.
- Cash increased substantially, while debt and other borrowings rose following $2.5 billion of March debt issuance. The company repurchased $609 of shares in the first six months but suspended repurchases in March; none occurred in Q2.
Outlook, risks, and unusual items
- Management said the pandemic’s effects were difficult to predict and could be material. Sales were unusually strong but volatile by month, channel, and category. No specific earnings or revenue guidance was provided.
- Target expected 2020 capital expenditures to be lower than in 2019. It reduced its remodel expectation to approximately 130 in 2020 from approximately 300, and expected up to 30 new small-format stores rather than 36.
- Management said liquidity was adequate and anticipated continued access to commercial paper and long-term financing. Undrawn committed credit facilities totaled $3.4 billion, including a new $900 million facility expiring in April 2021. The company expected to remain in compliance with debt covenants.
- Q1 merchandise-order cancellation fees of $216 were recorded in cost of sales. In Q2, fewer-than-expected returns following a temporary returns suspension led to a $146 increase in sales and a $110 increase in operating income from revising the returns estimate.
- Q2 adjusted EPS excluded a $9 pretax investment gain and $25 of other items, including store damage and inventory losses related to civil unrest. The filing also reports impairment charges of $60 for the six months.
- Management stated its dividend policy was unchanged and intended to continue quarterly dividends. COVID-19-related risks include unpredictable consumer behavior, operating costs, supply-chain demands, and possible changes to business operations. Physical inventory counts were suspended in March and resumed in June using statistical sampling; estimated shrink and markdown losses continued to be recorded.
Important facts for investors to verify
- Confirm the reporting-period mismatch: the supplied filing is Q2 2020, not Q2 2019.
- Assess whether exceptional comparable-sales and digital growth levels persisted after the quarter, and how category and channel mix affected margins.
- Review the effect of the $146 returns-estimate benefit and other adjustments when evaluating underlying earnings.
- Monitor cash conversion, inventory and payable trends, debt levels, and the April 2021 maturity of the additional revolving credit facility.
- Track pandemic-related costs, capital-spending changes, store remodels, and the resumption or continued suspension of share repurchases.