Business context and reporting period
Target Corporation’s fiscal 2013 Form 10-K covers the 52 weeks ended February 1, 2014. The request metadata says “2012 Q4,” but this filing is an annual report for fiscal 2013; the comparable fiscal 2012 included 53 weeks. Target operates U.S. and Canadian retail segments. In March 2013, it sold its U.S. consumer credit card receivables to TD Bank Group; Target retained servicing and marketing roles and shares in portfolio profits.
Financial performance and position
| Metric | Fiscal 2013 | Prior comparable period |
|---|---|---|
| Total revenue | $72.596 billion | $73.301 billion |
| Net earnings | $1.971 billion | $2.999 billion |
| Diluted EPS, GAAP | $3.07 | $4.52 |
| Adjusted diluted EPS, non-GAAP | $4.38 | $4.76 |
| Cash from operations | $6.520 billion | $5.325 billion |
| Capital expenditures | $3.453 billion | $3.277 billion |
| Cash and cash equivalents at year-end | $695 million | $784 million |
| Long-term debt, including current portion | $13.782 billion | $17.648 billion |
Retail sales were $72.596 billion, up 0.9% from $71.960 billion; the lower reported total revenue primarily reflects the credit-card portfolio sale and the resulting change in revenue presentation. Comparable sales declined 0.4%, versus growth of 2.7% in fiscal 2012. U.S. Segment sales fell 0.9% to $71.279 billion and EBIT declined 11.3% to $4.959 billion; its gross margin rate was 29.8% and EBIT margin rate 7.0%. Canada generated $1.317 billion in sales and a $941 million EBIT loss during its first year of retail operations.
Net interest expense increased 47.7% to $1.126 billion, including a $445 million loss on early debt retirement. The effective tax rate rose to 36.5% from 34.9%. Fiscal 2013 GAAP earnings included $1.13 per diluted share of Canadian losses; management’s $4.38 adjusted EPS excludes specified items and is a non-GAAP measure.
Material changes versus prior period
- Net earnings fell 34.3% and GAAP diluted EPS fell 32.1%; adjusted diluted EPS declined 8.0%.
- The U.S. credit-card portfolio sale produced $5.7 billion in cash consideration and a $391 million gain. Target repaid $1.5 billion of related nonrecourse debt and used proceeds for additional debt reduction and other capital allocation.
- Target opened 124 Canadian stores, its first international retail expansion. Canadian results included a $714 million EBITDA loss and a $941 million EBIT loss.
- Year-end inventory increased to $8.766 billion from $7.903 billion; approximately half of the increase related to the Canadian launch.
- Target paid $1.006 billion in dividends and repurchased 21.9 million shares for $1.474 billion. It paused share repurchases in the second half of the year, citing performance and the desire to preserve investment-grade credit ratings.
Outlook, risks and unusual items
- Management expected fiscal 2014 capital expenditures of $2.4–$2.7 billion, including $0.3–$0.4 billion for Canada. It planned to accelerate approximately $100 million of investment in chip-enabled cards and U.S. store readers by the first quarter of 2015.
- The fourth-quarter data breach involved payment-card data from approximately 40 million accounts and personal information for up to 70 million individuals. Target recorded $61 million of related pretax costs, partially offset by a $44 million insurance receivable. It had more than 80 related lawsuits and multiple government investigations; additional costs and potential losses could be material, and the filing says a loss range could not be reasonably estimated.
- Target said U.S. comparable sales turned meaningfully negative after the breach announcement and began recovering in January 2014, but it could not predict the duration or extent of any continuing impact.
- Canadian sales and operating results were below initial expectations. Management identified market acceptance, inventory management and execution as important factors in improving results.
- Liquidity included an unused $2.25 billion revolving credit facility through October 2018 and $80 million of commercial paper outstanding at year-end. Standard & Poor’s rating outlook was negative; management believed recent performance could lead to a one-notch downgrade. The company reported compliance with debt covenants.
- The filing identifies competition, consumer confidence, execution of multichannel and technology initiatives, supply-chain disruption, labor costs, regulatory changes, and data-security and reputational damage as material risks.
Important facts for investors to verify
- Track data-breach litigation, investigations, payment-network claims, insurance recoveries and subsequent expenses against the limited amounts accrued at year-end.
- Assess whether U.S. sales, comparable sales and REDcard use recover after the breach, separating underlying trends from calendar, weather and promotional effects.
- Monitor Canadian sales, margins, inventory and cash requirements against management’s plans and the initial-year operating losses.
- Reconcile GAAP earnings with adjusted EPS, including the exclusions for Canadian losses, debt retirement, the receivables transaction and other items.
- Review debt ratings, interest expense, cash generation, capital spending and the continuation of dividends or share repurchases.
The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of February 1, 2014.