Target Corporation — Form 10-Q summary
Reporting period: Quarter and six months ended August 1, 2015; filed August 25, 2015. The supplied metadata says “2014 Q2,” but the filing itself is for 2015 Q2. Comparisons below are against the corresponding 2014 periods.
Business context and results
Target reported one continuing-operations segment, spanning stores and digital channels. Its Canadian operations had been deconsolidated and were reported as discontinued operations after entering liquidation proceedings.
| Metric | Three months ended Aug. 1, 2015 | Change vs. 2014 | Six months ended Aug. 1, 2015 | Change vs. 2014 |
|---|---|---|---|---|
| Sales | $17.427 billion | +2.8% | $34.546 billion | +2.8% |
| Gross margin | $5.376 billion; 30.9% | Rate +0.5 percentage points | $10.584 billion; 30.6% | Rate +0.6 percentage points |
| Segment EBIT | $1.350 billion | +17.5% | $2.611 billion | +18.5% |
| Continuing-operations net earnings | $773 million | vs. $391 million | $1.424 billion | vs. $962 million |
| Continuing-operations diluted EPS | $1.21 | vs. $0.61 | $2.21 | vs. $1.51 |
| Net earnings, including discontinued operations | $753 million | vs. $234 million | $1.388 billion | vs. $653 million |
Second-quarter comparable sales rose 2.4%, with stores contributing 1.8 percentage points and digital contributing 0.6 points. Digital sales increased 30%. Management attributed improved gross margin primarily to less promotion than in the prior-year period and favorable category mix, partly offset by digital mix. Lower SG&A rates reflected cost savings and marketing timing, partly offset by higher incentive compensation. Adjusted diluted EPS, a non-GAAP measure, was $1.22 for the quarter and $2.32 for six months; respective prior-year amounts were $1.01 and $1.93.
Cash flow, liquidity and capital
- Six-month operating cash flow from continuing operations was $1.966 billion, compared with $1.935 billion. Total operating cash flow, including discontinued operations, was $2.789 billion versus $1.514 billion.
- Cash and cash equivalents were $2.742 billion at August 1, 2015, compared with $766 million a year earlier. The balance included $1.985 billion of short-term investments.
- Capital expenditures were $710 million for six months, down from $881 million.
- Long-term debt and other borrowings were $12.724 billion, including $841 million current and $11.883 billion noncurrent; the prior-year total was $12.919 billion. Debt’s estimated fair value was $13.365 billion. Commercial paper was zero at period-end.
- Target had a $2.25 billion committed revolving credit facility, expiring October 2018, with no borrowings during 2015 or 2014. Management said it expected to remain in covenant compliance and considered liquidity adequate for operations, strategic investment, Canada-exit and data-breach obligations, dividends, and repurchases.
- Six-month financing uses included $665 million of dividends and $1.237 billion of share repurchases. The repurchase authorization was expanded to $10 billion; cumulative repurchases under the program through August 1 totaled $4.4 billion.
Material changes, outlook and risks
- Pharmacy and clinic sale: Target agreed to sell these businesses to CVS for approximately $1.9 billion, subject to regulatory and other closing conditions. Target expected a pretax gain of about $550 million and approximately $800 million of deferred income recognized over 23 years. It anticipated using approximately $1.4 billion of after-tax proceeds to settle about $200 million of retained net liabilities and return capital to shareholders. Management expected the deal to be EPS-accretive after closing and to improve ROIC over time; these are estimates, not completed results. Closing could be terminated if it did not occur by the specified contractual deadline.
- Canada exit: All Canadian stores were closed by May 2, 2015. Six-month discontinued-operations loss was $36 million, including $113 million of pretax exit costs. Accrued liabilities include estimated claims, primarily involving lease guarantees. Target said it could not estimate possible losses beyond its accrual and that future changes or payments could materially affect results.
- Data breach: Target recorded $12 million of breach-related expense in the first half and had $168 million of accrued liabilities and a $55 million insurance receivable at August 1. It agreed to pay up to $67 million under a Visa settlement and separately agreed to a proposed $10 million guest-class settlement subject to court approval. Other payment-network, issuer, shareholder, regulatory and related matters remained unresolved. Target warned that a material loss beyond its accrual was reasonably possible but not estimable.
- Restructuring and unusual items: Headquarters workforce reductions generated $114 million of first-half charges, mostly severance; $100 million had been paid or otherwise settled by August 1. The prior-year comparison included a $285 million debt-extinguishment loss, contributing to the sharp decline in net interest expense this period. Target’s pension-plan remeasurement was expected to lower 2015 pension expense by $26 million.
- Management outlook: The filing did not provide a clear full-year earnings or sales guidance figure. Target noted the seasonal nature of its business and that quarterly results may not indicate full-year performance. It expressed intent to continue dividends and expected continued access to financing, while identifying transaction-closing, customer-response, CVS relationship, litigation, Canada-exit, insurance-recovery and execution risks.
Most important facts for investors to verify
- Whether the CVS transaction receives approvals and closes on expected terms, and whether the estimated gain, deferred income, proceeds and EPS benefits are realized.
- The eventual cash cost and timing of Canada liquidation and lease-guarantee claims, including any losses beyond recorded accruals.
- Resolution of data-breach claims and investigations, adequacy of accruals and insurance recoveries, and court approval of the guest settlement.
- Whether comparable-sales growth, digital growth and margin improvement continue, given promotional, category-mix and digital-fulfillment effects.
- Capital allocation and balance-sheet effects of substantial repurchases and dividends, alongside debt maturities and access to financing.