Target Corporation — Form 10-Q Summary
Reporting period: Quarter ended October 29, 2016, with nine-month results compared with the periods ended October 31, 2015. The request metadata says “2015 Q3,” but the filing itself reports third-quarter 2016.
Business context and results
Target operates as one segment, selling through stores and digital channels. The December 2015 sale of its pharmacy and clinic businesses to CVS materially affects year-over-year sales comparisons.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Sales | $16.441 billion | $17.613 billion | $48.805 billion | $52.159 billion |
| Gross margin | $4.970 billion | $5.173 billion | $15.048 billion | $15.757 billion |
| Continuing-operations earnings | $608 million | $476 million | $1.847 billion | $1.900 billion |
| Net earnings | $608 million | $549 million | $1.920 billion | $1.937 billion |
| Diluted continuing-operations EPS | $1.06 | $0.76 | $3.14 | $2.98 |
| Adjusted diluted continuing-operations EPS | $1.04 | $0.86 | $3.56 | $3.18 |
Q3 gross margin rate rose to 30.2% from 29.4%; EBIT margin rose to 6.4% from 5.5%. For nine months, gross margin rate was 30.8% versus 30.2%, and EBIT margin was 7.4% versus 6.8%. Management attributed gross-margin improvement to the pharmacy-sale comparison and favorable category mix, partly offset by higher shipping costs; cost savings helped offset promotional competition. SG&A rates improved to 20.3% for the quarter and 20.0% year to date, partly due to technology savings and the pharmacy transaction.
Cash flow, balance sheet and capital allocation
- Nine-month operating cash flow from continuing operations was $2.770 billion, down from $3.035 billion. Management cited approximately $500 million of taxes paid in Q1, primarily related to the pharmacy transaction.
- Capital expenditures were $1.184 billion. Cash and cash equivalents at October 29, 2016 were $1.231 billion, versus $1.977 billion at October 31, 2015.
- At October 29, 2016, total current assets were $12.842 billion and current liabilities were $12.642 billion. Long-term debt and other borrowings were $12.097 billion, with $729 million current. Total shareholders’ investment was $11.069 billion.
- Nine-month financing cash use was $4.558 billion, including $3.034 billion for share repurchases and $1.011 billion for dividends. Target returned $1.2 billion to shareholders in Q3.
- Target issued $2 billion of unsecured debt in April 2016 and repurchased $1.389 billion of debt before maturity for $1.8 billion, recording a $422 million early-retirement loss in net interest expense. Nine-month net interest expense was $864 million versus $455 million.
- A new $2.5 billion revolving credit facility, expiring in October 2021, replaced a $2.25 billion facility; no amounts were drawn. The company reported compliance with debt covenants and credit ratings of A2/A/A- for long-term debt.
Changes, outlook and risks
- Q3 sales declined 6.7%, primarily because prior-year sales included $1.112 billion from the pharmacy and clinic businesses sold to CVS. Comparable sales declined 0.2%; traffic fell 1.2%, partly offset by a 1.0% increase in average transaction amount. Digital contributed 0.7 percentage points to comparable sales.
- Reported Q3 diluted EPS from continuing operations increased 39.7%; adjusted EPS increased 22.1%. Nine-month reported EPS rose 5.5% and adjusted EPS rose 11.9%. The nine-month adjusted measure excludes the debt-retirement loss and other specified items; it is non-GAAP.
- Management said liquidity should remain adequate to operate, invest, meet debt maturities, pay dividends and execute the repurchase program, and anticipated continued access to commercial paper and long-term financing. The filing provides no specific earnings or sales guidance.
- The board authorized a new $5 billion repurchase program, to begin after completion of the existing $10 billion program, which management expected by year-end 2016. The existing program had repurchased 133.1 million shares for $9.4 billion through October 29, excluding the unsettled accelerated repurchase.
- Canada discontinued-operations earnings for the first nine months were $73 million, primarily reflecting tax benefits from investment losses recognized after approval of the wind-down plan. Target reported receipts from the estate and a prior-period cash contribution.
- Risks noted include potential deterioration in debt-market access or higher funding costs if credit ratings fall, competitive and consumer factors, and uncertainty inherent in forward-looking statements. Management reported no material changes to previously disclosed risk factors or market-risk exposures, no material legal-proceeding developments, and effective disclosure controls.
Important facts for investors to verify
- Compare underlying sales and margins on a basis that accounts for the CVS pharmacy and clinic divestiture, and monitor comparable-sales traffic trends.
- Assess the effect of the $422 million debt-retirement loss when comparing GAAP and adjusted earnings; adjusted EPS is a company-defined non-GAAP measure.
- Track cash generation, inventory and working-capital needs, debt maturities, and the company’s capacity to sustain dividends and planned buybacks.
- Review completion and final economics of the accelerated share repurchase and the remaining authorization under the existing repurchase program.
- Monitor the Target Canada wind-down, lease-related accounting changes, and any changes in credit ratings, liquidity access or covenant compliance.