Target Corporation — Form 10-Q Summary
Period clarification: Although the request identifies 2011 Q3, this filing is for the quarter ended October 27, 2012 (fiscal 2012 Q3). Comparatives are the quarter and nine months ended October 29, 2011. Dollar amounts are in millions except per-share data.
Business context and reporting period
Target operates U.S. retail, U.S. credit card and Canadian segments. The filing reports three-month and nine-month results; Target cautions that seasonal quarterly results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $16,929 | $16,402 | $50,575 | $48,577 |
| Earnings before interest and taxes | $1,164 | $1,057 | $3,703 | $3,622 |
| Net earnings | $637 | $555 | $2,038 | $1,948 |
| Diluted EPS | $0.96 | $0.82 | $3.06 | $2.84 |
| Cash flow from operations | Not stated for quarter | Not stated for quarter | $3,348 | $2,975 |
| Capital expenditures | Not stated for quarter | Not stated for quarter | $2,338 | $3,750 |
- Q3 revenue increased 3.2%; diluted EPS increased 17.6%. Management reported adjusted diluted EPS of $0.90, up 4.3%, excluding specified items. Nine-month adjusted diluted EPS was $3.12, up 6.8%.
- U.S. Retail Q3 sales rose 3.4%, including 2.9% comparable-store growth. Q3 gross margin was 30.3% versus 30.5%; EBITDA margin was 8.9% versus 9.1%; EBIT margin was unchanged at 5.8%.
- Nine-month operating cash flow was $3,348. Investing activities used $2,025 and financing activities used $655. Cash and cash equivalents were $1,469 at period-end, including $800 of short-term investments.
- At October 27, balance-sheet debt categories included $17,054 of unsecured debt and borrowings and $1,500 of nonrecourse debt collateralized by credit card receivables. The filing’s fair-value debt table reports carrying debt of $16,647 under a narrower definition that excludes specified items. Net interest expense was $192 for Q3 and $558 for the first nine months.
- Current liabilities were $15,709 and current assets were $18,495. The credit-card receivables held for sale were $5,647 net, following a $189 lower-of-cost-or-fair-value adjustment.
Material changes versus prior comparable periods
- Net earnings grew 14.8% in Q3 and 4.6% for the first nine months; diluted EPS rose 17.6% and 7.9%, respectively. Share repurchases reduced nine-month weighted-average diluted shares to 665.8 million from 686.9 million.
- Retail sales and EBIT increased, but Q3 gross margin and EBITDA margin rates edged down. Management attributed gross-margin pressure principally to the 5% REDcard Rewards and store-remodel programs, partly offset by underlying category improvements.
- Credit Card Segment profit declined to $138 in Q3 from $143 and to $417 for nine months from $508. Lower average receivables and the comparison with a prior-year reserve reduction contributed; nine-month bad-debt expense rose to $141 from $67.
- Canadian Segment losses increased to $96 in Q3 and $221 for nine months, compared with $35 and $81. Management attributed the increase to start-up costs and depreciation ahead of the planned Canadian market entry.
- Nine-month capital expenditures fell to $2,338 from $3,750. Target paid $635 in dividends and repurchased $1,255 of stock during the first nine months.
Outlook, transaction, risks and unusual items
- Target agreed to sell its entire U.S. consumer credit-card portfolio to TD Bank Group for cash equal to receivables’ gross par value at closing. Closing was expected in the first half of 2013, subject to regulatory approval and customary conditions. Target expected to continue servicing accounts and primary marketing, and to receive a substantial portion of portfolio profits.
- The agreement triggered a $156 Q3 gain from remeasuring receivables held for sale. At closing, Target expected an additional gain of approximately $350–$450, including the estimated fair value of a beneficial interest in future profit-sharing. These are estimates, not completed transaction results.
- Management expected to apply approximately 90% of net sale proceeds to reduce net debt, including repayment of a $1,500 variable funding certificate; the remainder was expected to support the share-repurchase program over time. After closing, Target expected to stop reporting a U.S. Credit Card Segment.
- Management stated that liquidity should remain adequate and that it expected continued access to financing. A $2,250 revolving credit facility was extended to October 2017 and had no outstanding balance. The nine-month interest-coverage ratio was 5.7x; Target said it was in compliance with debt covenants.
- Key uncertainties include whether and when the portfolio sale closes, the estimated receivables fair value and closing gain, Canadian launch costs and performance, credit-card portfolio risks, tax matters, and access to debt markets if credit ratings weaken. Target reported no identified litigation expected to be material and said recorded reserves were adequate.
- The filing provides no specific consolidated earnings or revenue guidance. It notes that actual results may differ from forward-looking statements and that quarterly results are affected by seasonality.
Important facts for investors to verify
- Whether the TD portfolio sale received regulatory approval and closed on the expected timeline, and the final proceeds, gain and beneficial-interest valuation.
- Whether expected debt reduction and subsequent share repurchases matched management’s stated allocation of sale proceeds.
- Whether retail margin trends, comparable-store sales and REDcard program economics developed as expected.
- Whether Canadian expansion costs and losses changed as stores and operations ramped up.
- How credit-card delinquencies, write-offs, receivables fair value and the ongoing profit-sharing arrangement performed after the portfolio transition.