Target Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended October 31, 2009, with comparisons to the quarter ended November 1, 2008. It is not a 2008 Q3 filing. Financial statements are unaudited; amounts are in millions except per-share data.
Business context and reporting period
Target operates retail and credit card segments. Management described the quarter as taking place in a challenging economy: retail comparable-store sales declined, while gross margin performance and expense discipline supported retail results. The credit card portfolio remained profitable, though credit quality pressures persisted.
Financial results and liquidity
- Third quarter: Total revenue was $15,276, up 1.1% year over year. Net earnings were $436, up from $369; diluted EPS was $0.58 versus $0.49. Earnings before interest and taxes were $874 versus $867.
- First nine months: Total revenue was $45,176, down 0.5%. Net earnings were $1,552 versus $1,605; diluted EPS was $2.06, compared with $2.06.
- Retail: Q3 sales rose 1.4%, while comparable-store sales fell 1.6% (versus a 3.3% decline a year earlier). Gross margin rate improved to 30.8% from 30.6%; EBIT was $791 versus $772. Nine-month EBIT was $2,816 versus $2,829.
- Credit card: Q3 segment profit increased to $60 from $35, but nine-month segment profit fell to $162 from $290. Nine-month bad debt expense rose to $900 from $751. The allowance was $1,025, or 12.7% of period-end gross receivables, versus $765, or 8.7%, a year earlier.
- Cash flow and investment: Nine-month operating cash flow was $3,027 versus $1,780. Capital expenditures were $1,440 versus $2,827. Cash and cash equivalents were $864 at quarter-end.
- Debt and liquidity: Total debt carrying value was $17,149, comprising unsecured debt and other borrowings and nonrecourse credit-card debt. A $1.9 billion unsecured revolving credit facility was undrawn. The company reported investment-grade debt ratings and expected to remain in compliance with debt covenants.
- Other balance-sheet items: Inventory was $9,382, up from $9,050 at November 1, 2008. Credit card receivables, net of allowance, were $7,023, down from $7,999 a year earlier.
Material changes versus the prior comparable period
- Q3 earnings improved despite a modest decline in comparable-store sales; retail gross margin and operating discipline were favorable contributors.
- For the first nine months, credit card profit weakened as bad debt expense increased and the portfolio’s spread to LIBOR narrowed. Gross receivables declined 8.2% year over year, while 90-plus-day delinquencies rose to 4.6% from 3.8%.
- Net interest expense declined to $191 in Q3 from $234 and to $588 for nine months from $652, reflecting lower average interest rates and, in part, lower average debt balances.
- Cash flow from operations increased, while capital expenditures and share repurchases were substantially lower than in the prior-year period. The open-market repurchase program remained temporarily suspended.
Outlook, risks, contingencies and unusual items
- Management expected strong Q4 profit growth against weak prior-year comparisons, while planning for modestly negative retail comparable-store sales. It expected a meaningful Q4 retail gross-margin-rate increase if sales met or exceeded that plan.
- Management forecast 2009 full-year capital expenditures of approximately $1.8 billion. For 2010, it expected about 12 new stores, approximately 350 remodels, and capital investment centered around $2.5 billion. It said a possible resumption of open-market share repurchases would be considered with the board, subject to maintaining strong credit ratings.
- Credit card results faced a challenging risk environment and legislative and regulatory changes. Target planned Q4 card-term changes and expected modest portfolio profitability in Q4 and into 2010; management cautioned that adverse effects would begin to be measurable in Q4.
- Credit risk indicators warrant attention: the allowance increased, net write-offs as a percentage of average gross receivables rose to 14.0% for the nine-month period from 8.7%, and troubled debt restructurings were 6.7% of gross receivables versus 4.0% a year earlier.
- Tax accounting method changes increased noncurrent deferred tax liabilities and current income taxes receivable by approximately $300, with no effect on quarterly income tax expense. A postretirement health-care plan amendment reduced the recorded liability by $46 and increased equity by $28 after tax; the benefit is expected to reduce expense over six years.
- A court-approved antitrust settlement was expected to produce an approximately $25 gain in Q4. Management said recorded litigation reserves were adequate and that identified claims were not expected to materially affect results, cash flows or financial condition. Several environmental matters were disclosed; the company anticipated monetary penalties but expected them not to be material.
- Management cited seasonal variability and forward-looking risks, including consumer demand, competition, credit losses, regulatory changes, capital plans and the ability to maintain credit ratings. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the reporting period: this filing covers Q3 2009, not Q3 2008.
- Track credit-card delinquency, write-off, allowance and restructuring trends, along with the effects of planned card-term changes.
- Compare Q4 and 2010 retail sales, gross margins and credit-card profitability with management’s stated expectations.
- Monitor delivery of the 2010 remodel and capital-investment plans, and any decision to resume open-market share repurchases.
- Review debt maturities, credit-facility availability, covenant compliance and the nonrecourse nature and funding of securitized receivables.
- Check recognition and receipt of the anticipated $25 million settlement gain and the ongoing outcomes of disclosed legal and environmental matters.