Target Corporation — Form 10-Q Summary
Period: The filing reports the quarter and six months ended July 29, 2017, compared with periods ended July 30, 2016. This conflicts with the request metadata identifying 2016 Q2.
Business context and results
Target operates as a single U.S.-focused retail segment, selling through stores and digital channels. Second-quarter comparable sales grew 1.3%, including a 2.1% increase in traffic; digital comparable sales grew 32%.
| Metric | Three months ended July 29, 2017 | Prior-year quarter | Six months ended July 29, 2017 | Prior-year six months |
|---|---|---|---|---|
| Sales | $16.429 billion | $16.169 billion | $32.446 billion | $32.364 billion |
| Net earnings from continuing operations | $671 million | $625 million | $1.349 billion | $1.239 billion |
| Diluted EPS from continuing operations | $1.22 | $1.07 | $2.44 | $2.08 |
| Adjusted diluted EPS, non-GAAP | $1.23 | $1.23 | $2.43 | $2.51 |
| EBIT | $1.114 billion | $1.241 billion | $2.291 billion | $2.564 billion |
Margins, cash flow and financial position
- Quarterly gross margin was 30.5%, down from 30.9%; EBIT margin was 6.8%, down from 7.7%. For the first half, gross margin was 30.3% versus 30.7%, and EBIT margin was 7.1% versus 7.9%.
- Management attributed gross-margin pressure to digital fulfillment costs and pricing and promotional efforts. Higher compensation, bonus expense and impairment losses increased SG&A; technology efficiency savings partly offset the increase.
- Operating cash flow from continuing operations was $2.866 billion for the first half, compared with $1.396 billion. Capital expenditures were $1.203 billion, versus $684 million.
- Cash and cash equivalents were $2.291 billion at July 29, 2017, including $1.387 billion held outside the U.S. and potentially subject to tax if repatriated. Total current liabilities were $12.729 billion.
- Current and long-term debt and other borrowings totaled $12.246 billion, down from $12.749 billion at January 28, 2017. Target repaid $598 million of debt at maturity in May. It reported a $2.5 billion committed revolving credit facility with no outstanding balance and stated it expected to remain in compliance with debt covenants.
- Target paid $663 million in dividends and repurchased $601 million of stock in the first half. The quarterly dividend declared was $0.62 per share.
Material changes, outlook and notable items
- Quarterly sales rose 1.6%; first-half sales rose 0.3%. First-half comparable sales were flat. Quarterly comparable sales improved from a 1.1% decline in the prior-year quarter, led by digital and higher traffic.
- Despite higher GAAP EPS, adjusted EPS was flat for the quarter and down 3.2% for the first half. Prior-year comparisons included $422 million of first-half debt-extinguishment losses; excluding specified items, adjusted EPS was $2.43 versus $2.51.
- First-half operating cash flow benefited partly from higher accounts payable following changes in vendor payment terms and improved inventory turnover. The comparison also benefited from approximately $500 million of taxes paid in the first quarter of 2016, primarily related to the pharmacy and clinic business sale.
- Target recorded $87 million of second-quarter impairment losses, primarily related to planned or completed store closures and supply-chain changes, versus $27 million in the prior-year quarter.
- No quantified earnings or sales guidance is provided in this filing. Management said liquidity should be adequate for operations, investment, debt maturities, dividends and planned share repurchases, and anticipated continued access to financing markets.
- Target expected adoption of the new lease standard to add $1.2–$1.7 billion of net lease liabilities and $0.9–$1.4 billion of leased assets, with the difference adjusting retained earnings. It did not expect a material earnings or liquidity impact.
- A federal court order dated July 31, 2017 dismissed previously reported securities and ERISA class actions concerning Target’s former Canadian expansion. The filing reported no material changes to the risk factors disclosed in the prior annual report.
Important facts for investors to verify
- Confirm the reporting period: the filing itself is for Q2 2017, not Q2 2016 as stated in the request metadata.
- Assess whether sales and traffic growth can offset the reported decline in gross-margin and EBIT rates, especially as digital fulfillment costs and promotional activity continue.
- Evaluate the sustainability of the first-half cash-flow increase, given the contribution from vendor payment terms, inventory turnover and the prior-year tax payment comparison.
- Review the non-GAAP EPS adjustments, impairment charges, lease-adoption estimates and timing of the new accounting standards.
- Monitor debt maturities, credit ratings, share repurchases and the outcome or appeal status of the dismissed litigation.