Target Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended July 30, 2016, and the six months then ended. This differs from the requested metadata of 2015 Q2.
Business context and reporting period
Target operates as one segment, serving customers through stores and digital channels. Results are reported for continuing operations unless otherwise noted. Comparisons are affected by the December 2015 sale of the pharmacy and clinic businesses to CVS and the wind-down of Target Canada.
Financial results and key metrics
| Metric | Three months ended July 30, 2016 | Prior-year quarter | Six months ended July 30, 2016 | Prior-year period |
|---|---|---|---|---|
| Sales | $16.169bn | $17.427bn | $32.364bn | $34.546bn |
| Gross margin | $5.067bn | $5.376bn | $10.078bn | $10.584bn |
| Continuing-operations earnings | $625m | $773m | $1.239bn | $1.424bn |
| Net earnings, including discontinued operations | $680m | $753m | $1.312bn | $1.388bn |
| GAAP diluted EPS from continuing operations | $1.07 | $1.21 | $2.08 | $2.21 |
| Adjusted diluted EPS from continuing operations | $1.23 | $1.22 | $2.51 | $2.32 |
- Quarterly sales declined 7.2%; management attributed much of the decline to the former pharmacy and clinic businesses, which contributed $1.055bn of prior-year-quarter sales. Comparable sales fell 1.1%, as transactions declined 2.2% and average transaction amount increased 1.1%.
- Gross margin rate rose to 31.3% from 30.9% in the quarter and to 31.1% from 30.6% for the half-year. Management cited the pharmacy sale and cost-of-goods savings, partly offset by higher shipping costs and competitive promotions.
- Quarterly segment EBIT was $1.241bn, down 8.1%; six-month segment EBIT was $2.564bn, down 1.8%. Quarter and half-year GAAP diluted EPS from continuing operations fell 11.6% and 5.9%, respectively. Adjusted EPS increased 0.5% and 8.2%.
- Net interest expense was $307m for the quarter and $722m for six months, including early-debt-retirement losses of $161m and $422m, respectively. Excluding specified items, adjusted EPS was $1.23 for the quarter and $2.51 for six months.
- Continuing-operations operating cash flow was $1.396bn for six months, down from $2.040bn. Management attributed the decrease primarily to about $500m in taxes paid in the first quarter, mainly related to the pharmacy transaction. Capital expenditures were $684m; cash dividends paid were $666m and share repurchases were $2.238bn.
- Cash and cash equivalents were $1.480bn at July 30, 2016, versus $2.742bn a year earlier. Current assets were $11.503bn and current liabilities $11.003bn. Long-term debt and other borrowings were $12.063bn, with a further $647m current portion.
Material changes, outlook, risks and unusual items
- Target issued $2bn of unsecured fixed-rate debt in April: $1bn at 2.5% due 2026 and $1bn at 3.625% due 2046. It repurchased $1.389bn principal of debt for $1.8bn in market value, recognizing a $422m early-retirement loss.
- Target Canada’s liquidation plan was approved in the quarter. The company contributed $27m to the estate and received $160m in distributions. Discontinued-operations earnings primarily reflected tax benefits from Canadian investment losses recognized after plan approval.
- Under its $10bn repurchase authorization, Target had repurchased 125.0m shares for $8.8bn through July 30, leaving about $1.179bn authorized. The company declared a quarterly dividend of $0.60 per share.
- Management said liquidity should remain adequate for operations, investment, debt maturities, dividends and planned repurchases, and expected continued access to financing markets. A $2.25bn revolving credit facility, expiring October 2018, had no borrowings. No numerical earnings or sales guidance was provided.
- Risks include potential deterioration in credit ratings, which could raise borrowing costs or restrict market access, and the competitive and consumer factors affecting sales. Management reported no material changes to previously disclosed risk factors or market-risk exposures, and expected compliance with debt covenants.
- New securities-related and ERISA class actions concerning prior Canada disclosures were filed; Target said it intended to defend them. The filing reported no material second-quarter change in the assessment of remaining data-breach claims and said it would stop reporting that matter separately.
- Management reported effective disclosure controls and no material second-quarter change in internal control over financial reporting. The company was evaluating the effect of the new lease accounting standard, effective in 2019.
Important facts for investors to verify
- How much of reported sales and margin movement reflects the pharmacy-business divestiture versus underlying comparable-sales trends.
- Whether transaction declines and higher shipping costs persist, and how digital-channel growth affects profitability.
- The cash-flow and liquidity impact of taxes, debt refinancing, capital spending, dividends and remaining share repurchase authorization.
- The assumptions behind adjusted EPS and ROIC, which are non-GAAP measures, and the $422m debt-retirement loss excluded from adjusted EPS.
- Developments in the Canada-related lawsuits, discontinued-operation settlements and remaining data-breach claims.