TARGET CORP quarterly report, Q3 FY2014

Business context and reporting period

Target Corporation’s Form 10-Q covers the quarter ended November 1, 2014, and the nine months then ended, with comparisons to the periods ended November 2, 2013. The request metadata says “2013 Q3,” but the filing itself is for 2014 Q3.

Target operates U.S. and Canadian retail segments. The company notes that its seasonal business means quarterly results are not necessarily indicative of full-year results.

Financial performance and liquidity

Quarterly U.S. comparable sales rose 1.2%; digital sales grew more than 30%. U.S. segment EBIT was $927m for the quarter and $3.158bn for nine months. Canadian sales rose 43.8% in the quarter, but the segment reported a $211m quarterly EBIT loss and a $627m nine-month loss.

U.S. gross margin rate declined to 29.5% for the quarter and 29.8% for nine months, mainly due to promotional activity. Consolidated net interest expense was $165m for the quarter and $788m for nine months; the latter included a $285m loss on early debt retirement.

At November 1, 2014, cash and cash equivalents were $780m; total current assets were $13.838bn and current liabilities were $13.525bn. Balance-sheet current and long-term debt and other borrowings totaled $14.304bn. Nine-month capital expenditures were $1.570bn. Operating cash flow was lower year over year, in part because the prior-year period included $2.7bn of proceeds related to the credit-card receivables sale.

Material changes, outlook, and risks

• Quarterly GAAP EPS included a $0.05-per-share benefit from resolved tax matters. Nine-month adjusted EPS excludes debt-retirement losses, data-breach costs, impairments, card-conversion costs, and other specified items.
• Target recorded $140m of net data-breach expenses for the first nine months. At quarter-end, the related liability was $178m and the insurance receivable was $62m. More than 100 related actions had been filed, and government investigations were ongoing. The company said a material loss beyond accruals was reasonably possible but could not be estimated.
• Canadian long-lived assets were reviewed for impairment; a $16m impairment was recorded for an operating store in the quarter. Target warned that additional impairment losses could occur and could be material.
• Management said liquidity should be adequate for operations, investment, data-breach obligations, dividends, and share repurchases for the foreseeable future. It reported no outstanding balance on its $2.25bn revolving credit facility and expected continued access to financing markets. No specific earnings guidance was provided.
• Standard & Poor’s lowered Target’s long-term debt rating from A+ to A in the first quarter of 2014. Management said it expected to remain in compliance with debt covenants. The company declared an intent to continue paying dividends.
• Cybersecurity incidents, litigation and regulatory claims, reputational damage, technology disruptions, Canadian operating losses and possible impairment, and changes in credit ratings are key risks discussed in the filing.

Most important facts for investors to verify

1. Confirm the reporting-period discrepancy: this filing is for the quarter ended November 1, 2014, not 2013 Q3.
2. Track U.S. comparable sales, digital growth, margins, and transaction trends, alongside continuing Canadian losses.
3. Monitor data-breach claims, insurance recoveries, accrued liabilities, and any exposure beyond recorded amounts.
4. Review debt maturities, borrowing costs, credit ratings, cash generation, and dividend sustainability.
5. Assess whether Canadian forecasts support realization of the $686m deferred tax asset and the carrying value of Canadian long-lived assets.