Target Corporation — Form 10-Q Summary
Reporting period: Three months ended May 2, 2015. The request metadata labels the period “2014 Q1,” but the filing is for first-quarter 2015.
Business context and results
Target operates as one continuing-operations segment, selling through stores and digital channels. Its Canadian subsidiaries were deconsolidated after filing for creditor protection in January 2015; all Canadian stores were closed by May 2, 2015.
- Sales were $17.119 billion, up 2.8% year over year. Comparable sales increased 2.3%, versus a 0.3% decline a year earlier; digital sales rose 37.8% and contributed 0.8 percentage points to comparable-sales growth.
- Gross margin was $5.208 billion, or 30.4% of sales, compared with $4.909 billion and 29.5%. Segment EBIT was $1.261 billion, up 19.7%; EBIT margin rose to 7.4% from 6.3%.
- Continuing-operations earnings were $651 million, versus $571 million. Diluted continuing-operations EPS was $1.01, versus $0.89; adjusted diluted EPS, a non-GAAP measure, was $1.10, versus $0.92.
- Net earnings were $635 million, compared with $418 million. Discontinued operations recorded a $16 million loss, versus a $153 million loss in the prior-year quarter.
- Continuing-operations operating cash flow was $717 million, down from $815 million. Capital expenditures were $352 million; cash and cash equivalents were $2.768 billion at quarter-end.
- Current and long-term debt and other borrowings totaled $12.766 billion at May 2, 2015. Long-term debt fair value was estimated at $13.542 billion against a $11.947 billion carrying amount for debt, excluding specified adjustments and capital leases.
Material changes and capital allocation
- Comparable sales returned to growth, with both transactions and average transaction amount contributing. Management attributed the higher gross margin rate mainly to lower promotions than in the highly promotional prior-year period, favorable sales mix, and lower clearance markdowns; increased digital mix partly offset those benefits.
- SG&A expense rate improved to 19.9% from 20.1%, reflecting cost savings partly offset by technology investment. Reported SG&A included $103 million of headquarters restructuring costs.
- Target resumed share repurchases: it spent $300 million on open-market purchases and prepaid $300 million under an accelerated share repurchase agreement during the quarter. The ASR was settled in May; total ASR investment was $265 million for 3.3 million shares. Dividends paid were $333 million, or $0.52 per share, versus $272 million, or $0.43 per share.
- Quarter-end cash was higher than the $677 million reported at May 3, 2014; debt and other borrowings were $12.766 billion, compared with $12.857 billion a year earlier.
Outlook, risks, and unusual items
- The filing provides no specific earnings or sales guidance. Management said liquidity should remain adequate for operations, investment, Canadian-exit and data-breach obligations, dividends, and planned share repurchases, and expected continued access to commercial-paper and long-term financing markets.
- Canada-exit liabilities include estimated probable losses, primarily related to lease guarantees. Target said it could not reasonably estimate possible losses beyond its recorded accrual, and future changes or payments could materially affect results.
- Data-breach litigation and payment-card-network claims remain unresolved. The filing reports $167 million of accrued liabilities and $55 million of insurance receivables at May 2, 2015, and says a material loss in excess of accruals is reasonably possible, though not estimable. A proposed $10 million guest-class settlement awaited court approval; a MasterCard settlement did not meet its issuer-acceptance condition.
- The $103 million restructuring charge primarily related to severance; most related cash expenditures were expected by the end of the second quarter. Pension-plan remeasurement was expected to reduce 2015 pension expense by $26 million.
- Target cited continuing investigations and litigation related to the data breach, Canadian-exit claims, and a California environmental-law allegation. Management reported no material change to the risk factors in its latest Form 10-K. Quarterly results may not indicate full-year performance because of seasonality.
Important facts for investors to verify
- Progress and ultimate cost of the Canada liquidation, including lease-guarantee claims and realization of tax benefits.
- Data-breach settlement outcomes, insurance recoveries, and whether losses exceed recorded accruals.
- Whether comparable-sales and margin improvements persist, particularly as digital sales mix grows.
- Cash generation, debt-market access, and capital allocation among investment, dividends, and repurchases.
- Timing and realized savings from restructuring, and the expected pension-expense reduction.