Target Corporation — Form 10-Q Summary
Period: Second quarter and six months ended August 2, 2014. The request metadata says “2013 Q2,” but the filing is for 2014 Q2.
Business context and reporting period
Target operates U.S. and Canadian retail segments. The filing notes that results are seasonal and quarterly performance may not indicate full-year results. The U.S. credit-card receivables portfolio was sold to TD Bank in March 2013; Target continues to service and market the cards and shares in portfolio profits.
Key financial metrics
| Metric | Three months ended Aug. 2, 2014 | Prior-year quarter | Six months ended Aug. 2, 2014 | Prior-year six months |
|---|---|---|---|---|
| Sales | $17.406 billion | $17.117 billion | $34.456 billion | $33.823 billion |
| Net earnings | $234 million | $611 million | $653 million | $1.110 billion |
| Diluted EPS | $0.37 | $0.95 | $1.02 | $1.72 |
| Adjusted diluted EPS (non-GAAP) | $0.78 | $0.98 | $1.48 | $1.79 |
| Cash provided by operations | Not presented separately for the quarter | Not presented separately for the quarter | $1.514 billion | $4.109 billion |
- Quarterly sales rose 1.7%, while net earnings and diluted EPS fell sharply. Adjusted EPS also declined, by 20.6% for the quarter and 17.5% for the six-month period.
- U.S. comparable sales were flat for the quarter versus 1.2% growth a year earlier; transactions declined 1.3%. Digital sales grew more than 30% in the quarter.
- U.S. gross margin rate was 30.4% versus 31.4% in the quarter, with management attributing virtually all of the decrease to promotional activity. U.S. EBIT was $1.160 billion, down 12.8%.
- Canadian sales rose 63.1% in the quarter to $449 million, mainly reflecting a larger store base. Canadian comparable sales declined 11.4%, and the segment reported a $204 million EBIT loss.
- Cash and cash equivalents were $803 million at quarter-end. Current assets were $11.554 billion and current liabilities $11.336 billion. Current and long-term debt and other borrowings totaled $14.158 billion.
- Six-month operating cash flow was $1.514 billion, down from $4.109 billion; the prior-year period included $2.7 billion of proceeds from the credit-card receivables sale. Capital expenditures were $1.052 billion.
- Six-month net interest expense was $622 million, including a $285 million loss on early debt retirement. The comparable 2013 period included a $445 million early-retirement loss.
Material changes versus prior comparable periods
- Second-quarter reported diluted EPS included $0.27 per share from the debt-retirement loss and $0.11 per share of net data-breach expense. Other disclosed adjustments included land impairments and reduction of the beneficial-interest asset.
- Target issued $2 billion of unsecured debt in June 2014: $1 billion at 2.3%, due 2019, and $1 billion at 3.5%, due 2024. Proceeds supported debt repurchases, maturities and general corporate purposes.
- Compared with the prior-year six-month period, Target recorded no receivables-sale gain in 2014; the prior-year period included a $391 million gain.
- Target paid $545 million in dividends during the first six months. In June, the board raised the quarterly dividend from $0.43 to $0.52 per share, beginning with the September 10, 2014 payment. There were no open-market share repurchases in the six-month period.
Outlook, risks, contingencies and unusual items
- Data breach: The filing describes theft of payment-card data from up to approximately 40 million accounts and other guest information for up to 70 million individuals. Second-quarter net expense was $111 million; six-month net expense was $129 million. At August 2, liabilities accrued were $182 million and an insurance receivable was $70 million. Target states that a material loss above the accrual is reasonably possible but cannot estimate the amount. Claims, litigation and governmental investigations remain ongoing.
- Network-security insurance provides $100 million of coverage above a $10 million deductible, subject to a $50 million sublimit for payment-card-network settlements. Target had received $20 million from insurers as of August 2.
- Management said liquidity sources should be adequate for operations, investment, dividends, share repurchases and breach-related obligations. A $2.25 billion revolving facility, expiring in October 2018, had no outstanding balance. Target reported compliance with debt covenants; Standard & Poor’s had lowered its long-term debt rating from A+ to A in Q1 2014.
- Management considers Canadian long-lived assets recoverable based on forecasts, but warned that failure to achieve forecast sales and earnings could lead to a potentially material impairment. Canadian deferred tax assets of $631 million depend on sufficient future taxable income to realize net operating loss carryforwards.
- Target cited weaker-than-expected U.S. sales following the breach and a June 2014 point-of-sale system disruption that caused checkout delays. It warned that further technology disruption, reputational damage, or reduced REDcard participation could adversely affect results.
- No quantified earnings or sales guidance is provided in the supplied filing text. Management’s forward-looking statements are subject to risks and are not guarantees of future results.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for the quarter ended August 2, 2014, not 2013 Q2.
- Track subsequent data-breach claims, settlements, insurance recoveries and any losses above the accrued amount.
- Assess whether U.S. comparable sales, transactions and margins improve, and whether digital growth translates into stronger profitability.
- Monitor Canadian comparable sales, operating losses, forecast performance and potential asset-impairment or deferred-tax-asset valuation effects.
- Review debt maturities, interest costs, credit ratings, cash generation and the sustainability of dividends and planned capital allocation.