Target Corporation — Form 10-Q Summary
Reporting period: Three months ended May 4, 2013. The request metadata says “2012 Q1,” but the filing covers first-quarter fiscal 2013 and compares results with the three months ended April 28, 2012. Amounts are in U.S. dollars.
Business context and key results
Target operated U.S. and Canadian segments. In March 2013, it sold its U.S. consumer credit card receivables portfolio to TD Bank Group (TD); TD now owns and funds the receivables, while Target services accounts, markets the cards, and receives a share of portfolio profits.
- Revenue: Total revenue was $16.706 billion, versus $16.867 billion. The prior-year total included $330 million of credit card revenue; merchandise sales increased 1.0% to $16.706 billion. U.S. sales rose 0.5%, while comparable-store sales fell 0.6%.
- Profit: Net earnings were $498 million, down from $697 million. Diluted EPS was $0.77, down from $1.04. Management’s non-GAAP adjusted diluted EPS was $1.05, down 5.0% from $1.11; this measure excludes specified items and is not GAAP.
- Margins: Consolidated EBIT was $1.408 billion, including the $391 million receivables-sale gain. U.S. gross margin rate rose to 30.7% from 30.2%; U.S. EBIT margin rate was 7.5% versus 8.1%. The Canadian segment recorded a $205 million EBIT loss.
- Cash flow: Operating cash flow was $3.230 billion versus $1.307 billion; investing activities provided $2.253 billion versus using $659 million. These results included $5.7 billion of portfolio-sale proceeds, reported across operating and investing cash flows.
- Liquidity and debt: Cash and equivalents were $1.819 billion at May 4, up from $784 million at fiscal year-end. Current assets were $11.857 billion and current liabilities $11.159 billion. Current and long-term debt and other borrowings totaled $14.214 billion, compared with $17.648 billion at February 2, 2013. A $2.25 billion revolving credit facility was undrawn; management said it expected to remain in compliance with debt covenants.
- Capital returns: Target repurchased 8.5 million shares for $547 million and paid $232 million in dividends. The quarterly dividend declared was $0.36 per share, up from $0.30.
Material changes and unusual items
- The credit card portfolio sale generated $5.7 billion cash consideration and a $391 million gain; Target repaid $1.5 billion of secured nonrecourse debt. A $208 million beneficial-interest asset remained, representing estimated future profit-sharing; its valuation depends on forecasts and market-based assumptions.
- Target recorded a $445 million loss on early debt retirement, included in net interest expense. Net interest expense rose to $629 million from $184 million.
- Canadian operations began opening stores: 24 were open by quarter-end. The segment’s $205 million loss compared with $55 million a year earlier, reflecting start-up, operating, and depreciation costs. Target expected to open 124 Canadian stores during 2013; management cautioned that early-period margin rates were not expected to persist.
- U.S. SG&A expense rate increased to 20.3% from 19.0%, reflecting a smaller credit-card income benefit, TD profit-sharing arrangements, and technology and multichannel investments. A vendor-contract accounting change shifted consideration between cost of sales and SG&A without affecting EBIT or EBITDA.
Outlook, risks, and controls
Management said liquidity should be adequate to fund operations, expansion, strategic initiatives, dividends, and share repurchases, and intended to use remaining portfolio-sale proceeds to reduce debt while continuing buybacks. The filing provides no numerical full-year earnings guidance. Forward-looking statements include risks around Canadian performance and openings, credit-market access and ratings, the beneficial-interest asset, and economic conditions. Management reported no material changes to the risks in the 2012 Form 10-K, no material market-risk changes, and effective disclosure controls.
Important facts for investors to verify
- How the portfolio sale, debt-retirement loss, tax effects, and reduced future credit-card income affect sustainable earnings and cash flow.
- Whether U.S. sales, comparable-store trends, and SG&A pressures improve, and how TD profit-sharing compares with the former credit-card economics.
- The pace, investment requirements, and losses associated with the Canadian rollout, including progress toward the 124-store plan.
- The assumptions and sensitivity underlying the $208 million beneficial-interest asset and the expected timing of its reduction.
- Debt-reduction and share-repurchase priorities, liquidity, and credit ratings; management noted that a ratings downgrade could increase borrowing costs or impair market access.