Business context and reporting period
Target Corporation is a U.S. discount retailer with U.S. Retail, U.S. Credit Card and Canadian segments. This 10-K covers fiscal 2012, ended February 2, 2013, a 53-week year; fiscal 2011 had 52 weeks. Although the request metadata says “2011 Q4,” the filing is for fiscal 2012 and includes fourth-quarter results. The quarter included 14 weeks versus 13 in the prior-year quarter.
Target operated 1,778 stores in 49 states and the District of Columbia at year-end. It planned to open 124 stores in Canada in 2013. Approximately one-third of 2012 sales came from owned and exclusive brands.
Financial performance and position
- Revenue: Fiscal-year total revenue rose 4.9% to $73.301 billion from $69.865 billion. U.S. Retail sales increased 5.1% to $71.960 billion; comparable-store sales rose 2.7%. The extra week contributed 1.7 percentage points to annual sales growth. Fourth-quarter revenue was $22.726 billion versus $21.288 billion.
- Profit: Net earnings were $2.999 billion, up from $2.929 billion. Diluted EPS rose 5.6% to $4.52. Management’s non-GAAP adjusted diluted EPS was $4.76 versus $4.41, excluding specified items. Fourth-quarter net earnings were $961 million versus $981 million; diluted EPS was $1.47 versus $1.45.
- Margins: U.S. Retail gross margin rate declined to 29.7% from 30.1%; EBITDA margin was 9.8% versus 10.0%, while EBIT margin held at 7.0%. Consolidated earnings before interest and taxes increased 0.9% to $5.371 billion.
- Cash flow and investment: Operating cash flow was $5.325 billion, compared with $5.434 billion. Capital expenditures were $3.277 billion, down from $4.368 billion. Cash and cash equivalents were $784 million at year-end.
- Debt and liquidity: Long-term debt, including its current portion, was $17.648 billion, compared with $17.483 billion. Year-end commercial paper outstanding was $970 million; the company also had an undrawn $2.25 billion revolving facility expiring in 2017. Interest coverage was 6.1x. Target reported compliance with debt covenants and said liquidity was adequate for anticipated needs.
- Shareholder returns: Dividends declared were $1.38 per share, up from $1.15. Target repurchased 32.2 million shares for $1.9 billion during the year.
Material changes versus the prior comparable period
- Sales growth benefited from the extra fiscal week, new stores and comparable-store gains. Gross margin pressure reflected the 5% REDcard Rewards program and store remodels, which shifted sales toward lower-margin categories, including food.
- U.S. Credit Card Segment profit declined to $557 million from $606 million, primarily reflecting higher bad-debt expense after the prior year’s substantial reserve reduction and lower finance-charge revenue from a smaller portfolio.
- Canadian segment losses widened to $369 million from $122 million, reflecting start-up costs and depreciation ahead of the 2013 retail launch.
- On March 13, 2013, after year-end, Target completed the sale of its credit-card receivables portfolio to TD Bank Group for $5.7 billion. It repaid $1.5 billion of related nonrecourse debt, producing net cash proceeds of $4.2 billion. Target will continue account servicing and primary marketing and receive a substantial share of portfolio profits; from 2013 it will no longer report a separate U.S. Credit Card Segment.
Outlook, commentary, risks and unusual items
- Management expected approximately $3.8 billion of 2013 capital expenditures, including about $1.5 billion for Canada, and a 2013 effective tax rate of 35.7%–36.7%, excluding resolutions of tax matters. Target expected vendor-contract changes to raise gross margin and SG&A rates by about 20–25 basis points each, with no impact on EBITDA or EBIT margins.
- The 2012 results included a $161 million gain related to receivables held for sale. Target expected a further $391 million gain on the completed sale in first-quarter 2013, including a $225 million beneficial-interest asset tied to future profit sharing. Management said the transaction’s effect was expected to become neutral and ultimately accretive to EPS over time.
- Key risks include intense retail and online competition; changing consumer preferences and markdown exposure; U.S. economic and consumer-confidence sensitivity; execution of the Canadian launch; supply-chain, commodity and labor-cost pressures; technology and data-security incidents; product safety; weather and natural disasters; and access to capital markets and credit.
- Other significant estimates and exposures include self-insurance and litigation, pension assumptions, uncertain tax positions, and the fair value estimate for receivables held for sale. Management said identified litigation was not expected to be material, while acknowledging that unfavorable rulings could have a material effect. The financial-statement and internal-control audits received unqualified opinions.
Important facts for investors to verify
- Confirm period comparability: fiscal 2012 had 53 weeks, and fourth-quarter results had 14 weeks.
- Assess the sustainability of comparable-store growth and the effect of REDcard discounts and remodel-driven sales mix on gross margin.
- Track Canada’s store-opening schedule, start-up losses, capital spending and market acceptance.
- Review post-sale credit-card profit-sharing economics, servicing costs, the beneficial-interest asset and intended use of sale proceeds, including debt reduction and buybacks.
- Monitor debt maturities, commercial-paper usage, credit ratings, liquidity and the continuation of share repurchases and dividends.
- Evaluate the assumptions behind adjusted EPS and other non-GAAP measures against reported GAAP results.