Business context and reporting period
Target Corporation’s Form 10-Q covers the three and nine months ended October 29, 2011; the comparable periods ended October 30, 2010. The filing describes a seasonal retail business with U.S. Retail, U.S. Credit Card and newly established Canadian segments. Figures below are in U.S. dollars unless stated otherwise. The request metadata says “2010 Q3,” but the filing itself is for third quarter 2011.
Financial performance and position
| Metric | Third quarter 2011 | Prior-year quarter | Nine months 2011 | Prior-year nine months |
|---|---|---|---|---|
| Total revenues | $16.402 billion | $15.605 billion | $48.577 billion | $46.729 billion |
| EBIT | $1.057 billion | $967 million | $3.622 billion | $3.475 billion |
| Net earnings | $555 million | $535 million | $1.948 billion | $1.885 billion |
| Diluted GAAP EPS | $0.82 | $0.74 | $2.84 | $2.57 |
| Operating cash flow | Not presented by quarter | $2.975 billion | $2.852 billion |
Quarterly revenue rose 5.1% and EBIT rose 9.4%. Management’s non-GAAP adjusted diluted EPS was $0.87 versus $0.68; it excludes the effects of Canadian market-entry costs and state tax matters. GAAP diluted EPS increased 10.2%.
U.S. Retail sales increased 5.4% in the quarter, including 4.3% comparable-store growth. Quarterly gross margin rate was 30.5% versus 30.6%; SG&A rate improved to 21.4% from 21.8%. Nine-month gross margin rate declined to 30.8% from 31.3%, while SG&A rate improved to 21.0% from 21.3%.
U.S. Credit Card segment profit was $143 million for the quarter and $508 million year to date, up from $130 million and $390 million, respectively. Lower bad-debt expense drove the improvement, partly offset by lower revenue. Nine-month bad-debt expense fell to $67 million from $445 million.
At October 29, cash and cash equivalents were $821 million; current assets were $18.372 billion and current liabilities $14.139 billion. Total debt was $17.228 billion, compared with $15.241 billion at January 29, 2011. Cash from operations was $2.975 billion; investing activities used $3.604 billion, including $3.750 billion of property and equipment expenditures. Financing activities used $236 million. The company had $1.211 billion of commercial paper outstanding and an undrawn $2.25 billion revolving credit facility maturing in October 2016.
Third-quarter U.S. Retail EBIT margin improved to 5.8% from 5.4%; nine-month margin was 6.6% in both periods. Credit-card receivables were $6.144 billion gross, down 8.7% year over year. Delinquent balances (30 or more days past due) were $310 million versus $485 million a year earlier.
Material changes versus comparable periods
- Retail comparable-store growth accelerated to 4.3% for the quarter from 1.6%; average transaction amount improved, while transaction growth slowed.
- The 5% REDcard program contributed to sales growth and mix pressure. REDcard penetration increased to 9.5% of store sales from 5.5%.
- Credit-card earnings improved as risk measures and delinquencies eased, but portfolio balances and finance-charge revenues declined.
- Share repurchases were $1.733 billion for the first nine months, versus $2.093 billion a year earlier; dividends paid rose to $549 million from $432 million. Shares outstanding declined to 671.4 million from 707.9 million at October 30, 2010.
- The company acquired Zellers leasehold interests for a final net purchase price of $1.636 billion, with 189 sites selected and plans to open 125–135 Canadian stores, primarily in 2013. The Canadian segment reported a $35 million quarterly loss and an $81 million nine-month loss.
Outlook, commentary and risks
- Management expected fourth-quarter 2011 diluted EPS of $1.43–$1.53. This outlook excludes an anticipated approximately $50 million fourth-quarter tax benefit, any credit-card portfolio sale, and any related early debt extinguishment.
- Management expected fourth-quarter comparable-store sales growth of 4% or slightly less, and retail EBIT margin approximately in line with the prior-year quarter. Canadian entry costs were expected to reduce fourth-quarter EPS by $0.07–$0.09.
- Planned 2011 U.S. retail capital expenditures were $2.6–$2.7 billion. The company expected to continue share repurchases and could repurchase up to $300 million in the fourth quarter.
- Target was negotiating a possible sale of its credit-card receivables portfolio, but said it would proceed only if strategic and financial conditions were appropriate. A sale agreement could occur as early as fourth quarter; no transaction was assured.
- Canada plans included investment of $2–$3 billion over three years. Zellers-related lease commitments included $3.5 billion of future minimum payments, with a reported net present value of $1.3 billion.
- Management cited access to capital markets, operating performance and debt ratings as liquidity factors. It reported compliance with debt covenants and a 5.5x interest coverage ratio for the first nine months. A rating downgrade could raise borrowing costs or impair market access.
- The company said identified litigation was not expected to be material and recorded reserves were adequate. It also noted that weaker U.S. economic conditions could increase credit-card bad debt expense. No material changes to previously disclosed risk factors or market-risk exposures were reported.
- A favorable resolution of state tax matters after quarter-end was expected to reduce fourth-quarter tax expense by approximately $50 million. The filing cautions that quarterly results are not necessarily indicative of full-year results because of seasonality.
Important facts for investors to verify
- Whether the potential credit-card portfolio sale is agreed, its terms, and any impact on earnings, funding, or nonrecourse debt.
- Fourth-quarter sales, margins and EPS against management’s outlook, including the excluded tax benefit and Canadian start-up costs.
- Credit-card receivables quality, allowance adequacy, delinquencies and bad-debt trends as portfolio balances contract.
- Canadian store-count decisions, total investment, lease obligations, opening schedule and path to profitability.
- Debt, commercial-paper usage, capital spending and share repurchases relative to operating cash generation and liquidity.