Target Corporation — Form 10-K Summary
Period clarification: The supplied filing is Target’s fiscal 2011 annual report, for the 52 weeks ended January 28, 2012—not a 2010 Q4 filing. Fiscal 2010, the comparison period, ended January 29, 2011.
Business context and reporting period
Target operated U.S. Retail, U.S. Credit Card, and Canadian segments. U.S. Retail includes stores and online sales. The Canadian segment began reporting in 2011 following the acquisition of Zellers leasehold interests; Target planned its first Canadian store openings for 2013. Retail results are seasonal, with a greater share of annual revenue and earnings typically in the fourth quarter.
Financial performance and position
- Revenue: $69.865 billion, up 3.7% from $67.390 billion. U.S. Retail sales were $68.466 billion, up 4.1%; comparable-store sales increased 3.0%.
- Profit: Net earnings were $2.929 billion, nearly unchanged from $2.920 billion. Diluted GAAP EPS increased 7.0% to $4.28, reflecting fewer weighted-average shares. Adjusted diluted EPS, a non-GAAP measure, was $4.41 versus $3.86.
- Operating results and margins: Earnings before interest and taxes were $5.322 billion, up 1.3%. U.S. Retail gross margin rate decreased to 30.1% from 30.5%; SG&A rate improved to 20.1% from 20.3%, leaving EBIT margin rate at 7.0%, versus 7.0%.
- Credit card segment: Segment profit rose to $606 million from $541 million as bad debt expense fell to $154 million from $528 million. Credit card revenue decreased 12.8% to $1.399 billion, chiefly due to lower average receivables. The allowance for doubtful accounts fell to $430 million from $690 million.
- Cash flow and investment: Operating cash flow was $5.434 billion, compared with $5.271 billion. Capital expenditures were $4.368 billion, up from $2.129 billion; operating cash flow less capital expenditures was approximately $1.066 billion. Year-end cash and cash equivalents fell to $794 million from $1.712 billion.
- Debt and liquidity: Reported debt, including current maturities, was $17.483 billion, versus $15.726 billion. A $2.25 billion revolving credit facility was unused at year-end; commercial paper outstanding was also zero. Interest coverage was 5.9x, compared with 6.1x. Current assets were $16.449 billion and current liabilities $14.287 billion.
- Shareholder returns: Target repurchased 37.2 million shares for $1.894 billion and paid $750 million in dividends. Dividends declared per share increased to $1.15 from $0.92.
Material changes versus the prior year
- U.S. Retail growth reflected 3.0% comparable-store growth and new stores. The 5% REDcard discount and remodels supported sales but pressured gross margin through discounts and increased food sales mix.
- Credit card profitability improved as delinquencies and bad debt expense declined, while the receivables portfolio and credit card revenue contracted.
- Target acquired 189 Canadian leasehold interests. After selling rights to 54 sites, the net purchase price was $1.636 billion. Canadian start-up costs were $74 million, and related depreciation was $48 million.
- Capital expenditures increased substantially, primarily due to the Canadian acquisition and U.S. store remodels. Net interest expense rose 14.4% to $866 million, including an $87 million loss on early retirement of debt.
Outlook, risks, contingencies, and unusual items
- Management expected approximately $3.3 billion of fiscal 2012 capital expenditures: $2.5 billion in U.S. Retail and $800 million in Canada. Fiscal 2012 was expected to comprise 53 weeks.
- Target planned to open 125 to 135 Canadian stores, primarily in 2013, and had announced its first 60 stores for opening beginning in March or early April 2013. The company cited execution risks involving renovations, supply chain, technology, hiring, and local sourcing.
- Management expected the consolidated effective tax rate for 2012 to be 36.7%–37.7%, excluding resolutions of income tax matters. It also expected year-over-year declines in U.S. Credit Card segment profit, principally because 2011 benefited from significant allowance reductions.
- The company temporarily suspended efforts to sell its credit card receivables portfolio until later in 2012; any sale was contingent on acceptable strategic and financial terms.
- Principal risks include U.S. consumer and economic conditions, retail competition and changing preferences, merchandise and supply-chain disruption or cost inflation, labor and benefit costs, data security and technology outages, product safety, and access to capital markets. Canadian expansion adds execution and foreign-currency exposure.
- An EPA investigation concerns alleged Clean Air Act asbestos-rule violations in remodeling 36 stores during 2003–2007; no specific relief had been sought. Target stated that identified claims and litigation were not expected to materially affect results, cash flows, or financial condition, while acknowledging litigation uncertainty.
- The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether Canadian store openings, supply-chain buildout, and planned spending remained on schedule and within budget.
- Whether retail comparable-store growth and gross margin trends held up as REDcard discounts and remodel-related food mix affected margins.
- Whether credit card delinquencies, charge-offs, and allowance levels remained sound—and whether a receivables sale proceeded on acceptable terms.
- How near-term debt maturities, higher reported debt, and ongoing repurchases and dividends affected liquidity and financing needs.
- Whether the EPA investigation, tax contingencies, and pension and self-insurance assumptions changed materially after the filing date.