Target Corporation — Form 10-K Summary
Reporting period: Fiscal 2009, the 52 weeks ended January 30, 2010. Although the request identifies “2008 Q4,” this filing is the annual report for fiscal 2009; it also reports fourth-quarter results.
Business context and financial results
Target operates U.S. Retail and Credit Card segments. Retail includes stores and Target.com; Credit Card offers the Target Card and Target Visa. The business is seasonal, with a larger share of annual revenue and earnings typically generated in the fourth quarter.
- Full year: Revenue was $65.36 billion, up 0.6% from $64.95 billion in 2008. Net earnings were $2.49 billion, up from $2.21 billion; diluted EPS was $3.30 versus $2.86.
- Fourth quarter: Revenue was $20.18 billion versus $19.56 billion. Net earnings were $936 million versus $609 million; diluted EPS was $1.24 versus $0.81.
- Retail: Sales rose 0.9% to $63.44 billion, while comparable-store sales fell 2.5% (after a 2.9% decline in 2008). Retail EBIT increased 7.3% to a record $4.38 billion. Gross margin rate improved to 30.5% from 29.8%; EBIT margin rose to 6.9% from 6.5%.
- Credit Card: Segment profit increased to $201 million from $155 million, despite revenue declining 6.9% to $1.92 billion. Year-end gross receivables fell 12.2% to $7.98 billion. Annualized net write-offs rose to 14.1% of average receivables from 9.3%; the allowance was $1.02 billion, or 12.7% of gross receivables.
- Cash flow and investment: Operating cash flow was $5.88 billion, up from $4.43 billion. Capital expenditures fell to $1.73 billion from $3.55 billion.
- Balance sheet and liquidity: Cash and cash equivalents, including marketable securities, were $2.20 billion; current assets were $18.42 billion and current liabilities $11.33 billion. Total debt, including current maturities and nonrecourse receivables debt, was $16.81 billion, down from $18.75 billion. The $2 billion revolving credit facility was undrawn, and there was no commercial paper outstanding at year-end.
- Shareholder returns: Dividends declared were $0.67 per share versus $0.62. Target repurchased 9.9 million shares for $479 million and resumed open-market repurchases in January 2010.
Material changes and management commentary
- Management attributed retail resilience to improved merchandise-category margins, including better markups and fewer markdowns, despite weak consumer conditions and lower comparable sales. Household essentials and food grew as a share of sales, while home furnishings and apparel were weaker.
- Credit Card profit improved through better portfolio performance and lower funding costs, while receivables contracted due to tighter underwriting, reduced credit lines for higher-risk customers, fewer new accounts, and lower card usage.
- Operating cash flow funded capital spending and debt repayment; Target also increased marketable securities by $1.3 billion. Inventory increased $474 million, partly reflecting unusually low prior-year levels and strategic food and pharmacy initiatives.
- Net interest expense declined to $801 million from $866 million, partly due to lower rates; it included a $16 million charge for early debt retirement. The effective tax rate declined to 35.7% from 37.4%.
Outlook, risks and contingencies
- For 2010, management expected Retail comparable-store sales growth of 2%–4%, including an estimated one-point contribution from remodels, and mid-single-digit total sales growth. It expected to generally preserve the 2009 Retail EBIT margin rate.
- Management expected 2010 Credit Card receivables to decline by a low-double-digit percentage, while segment profit would remain generally at the 2009 dollar level and pretax ROIC increase. The projected 2010 effective tax rate was 37.0%–37.5%.
- Expected 2010 capital expenditures were $2.0–$2.5 billion; the planned store program was approximately 13 openings in 2010 and 20–30 in 2011. Management also expected to continue share repurchases.
- Key risks include U.S. economic and consumer-confidence weakness; retail competition, changing preferences and markdown exposure; worsening credit losses or reduced card usage; regulatory limits on credit-card terms; workforce costs; supply-chain disruption and overseas sourcing; data security, product safety, legal compliance, natural disasters, and access to capital markets.
- Contractual obligations totaled $34.29 billion, including $16.62 billion of debt principal and $4.00 billion of operating lease payments. Estimated tax contingencies of $579 million were excluded from that table because settlement timing could not be reliably estimated.
- Environmental matters include California proceedings and an EPA investigation concerning alleged Clean Air Act/asbestos violations at 36 remodeled stores. Target expected potential sanctions exceeding $100,000 in these matters but stated they were not expected to be material. It also said identified litigation reserves were adequate and no currently identified claims were expected to materially affect results, cash flows or financial condition.
Most important facts for investors to verify
- Whether Retail comparable-sales growth and margin targets were achieved, and how remodels contributed to sales and costs.
- Credit Card loss trends: the 14.1% net write-off rate, 12.7% allowance ratio, delinquency trends and subsequent receivables contraction.
- Debt maturities, nonrecourse credit-card funding terms, and the effect of further receivables declines on repayment obligations.
- Cash conversion and capital allocation, including planned capital spending, dividends and resumed share repurchases.
- Developments in the $579 million tax contingency estimate and the environmental and other legal proceedings.