TARGET CORP quarterly report, Q2 FY2013

Business context and reporting period

Target Corporation’s 10-Q covers the quarter ended August 3, 2013, and the six months then ended. The request metadata says “2012 Q2,” but the filing itself is for 2013 Q2; 2012 figures below are comparatives. Target operated U.S. and Canadian segments after selling its U.S. consumer credit card receivables portfolio to TD Bank Group in March 2013.

Financial performance and position

For the six months, sales were $33.823 billion versus $32.989 billion; net earnings were $1.110 billion versus $1.401 billion; and diluted EPS was $1.72 versus $2.10. Adjusted diluted EPS was $2.24 versus $2.23. The filing attributes the difference between GAAP and adjusted results to Canadian market entry, credit-card-sale-related items, tax matters, and the debt-retirement loss.

U.S. segment EBIT was $1.330 billion in Q2, up 0.4%, with a 7.9% EBIT margin versus 8.0%. For the first half, U.S. EBIT was $2.569 billion, down 3.6%, and margin was 7.7% versus 8.1%. Canada reported a Q2 EBIT loss of $169 million and a first-half loss of $374 million, reflecting startup operations.

Cash provided by operations was $4.109 billion in the first half versus $2.471 billion. The 2013 amount included $2.7 billion of proceeds from selling receivables; a further $3.0 billion was reported in investing cash flows. Capital expenditures were $1.917 billion. Cash and cash equivalents were $1.018 billion at quarter-end, compared with $1.442 billion a year earlier. Balance-sheet current and long-term debt and other borrowings totaled $14.488 billion, down from $17.648 billion at February 2, 2013. A $2.25 billion revolving credit facility was available, with no outstanding balance.

Material changes and unusual items

• Target sold its entire U.S. consumer credit card portfolio to TD for $5.7 billion in cash plus a $225 million beneficial interest asset, recognized a $391 million gain, and repaid $1.5 billion of related nonrecourse debt. TD now owns, funds, and underwrites the receivables; Target continues servicing and marketing and receives profit-sharing income.
• Target recorded a $445 million loss on early retirement of debt in first-half net interest expense. First-half net interest expense was $801 million versus $366 million a year earlier.
• Q2 consolidated sales increased 4.0%, while comparable sales increased 1.2%; comparable-sales growth was driven by a higher average transaction amount despite fewer transactions.
• Target opened 68 Canadian stores in the first half and expected to open 124 in Canada during 2013. Management cautioned that startup-period Canadian margins may not indicate future results.
• Target repurchased 13.3 million shares for $927 million in Q2 and paid $231 million in dividends. The quarterly dividend declared was $0.43 per share, up from $0.36.

Outlook, commentary, and risks

Management said it expected adequate liquidity to fund operations, expansion and strategic initiatives, dividends, and share repurchases, and anticipated continued access to commercial paper and long-term financing. It expected to remain in compliance with debt covenants. The filing did not provide a specific earnings or sales forecast. Management expected 124 Canadian store openings in 2013 and stated that quarterly results may not indicate full-year performance because of seasonality.

Risks highlighted include reduced access to debt markets or higher borrowing costs if credit ratings decline, dependence on capital-market conditions and operating performance, possible changes in Canadian startup results, and sensitivity of the beneficial interest asset to U.S. economic conditions and portfolio performance. Target reported no material changes to its previously disclosed risk factors or market-risk exposures. The CEO and CFO concluded disclosure controls were effective; no material change in internal control was reported.

Important facts for investors to verify

• Assess underlying retail performance separately from the credit-card portfolio sale, its gain, and the related debt-retirement charge; adjusted EPS is a company-defined non-GAAP measure.
• Review the continuing TD profit-sharing arrangement and the $180 million beneficial interest asset, whose valuation depends on forecast portfolio performance and discount rates.
• Track comparable sales, transaction trends, U.S. SG&A costs, and the effect of REDcard incentives and technology/distribution investment on margins.
• Monitor Canadian store openings, startup losses, and capital needs against management’s 2013 plan.
• Evaluate liquidity and leverage alongside substantial share repurchases, dividends, debt maturities, and the stated dependence on continued capital-market access.