Target Corporation — FY2010 Form 10-K
Reporting period: The filing covers the 52-week fiscal year ended January 29, 2011, not fiscal 2009. It also provides fourth-quarter results; the filing’s full-year figures are for fiscal 2010.
Business context and reporting period
Target operated two reportable segments: Retail, including stores and Target.com, and Credit Card. At year-end it operated 1,750 stores in 49 states and the District of Columbia. The business is seasonal, with a larger share of annual sales and earnings typically in the fourth quarter.
Financial performance and liquidity
| Metric | FY2010 | FY2009 |
|---|---|---|
| Total revenue | $67.390 billion | $65.357 billion |
| Net earnings | $2.920 billion | $2.488 billion |
| Diluted EPS | $4.00 | $3.30 |
| Operating cash flow | $5.271 billion | $5.881 billion |
| Cash and cash equivalents | $1.712 billion | $2.200 billion |
| Long-term debt, including current portion | $15.726 billion | $16.814 billion |
- Retail sales rose 3.7% to $65.786 billion; comparable-store sales increased 2.1%, versus a 2.5% decline in FY2009. Retail EBITDA increased 4.9% to $6.694 billion and EBIT increased 5.8% to $4.629 billion.
- Retail gross margin rate was 30.5%, unchanged year over year; SG&A rate improved to 20.3% from 20.5%, and EBIT margin rate rose to 7.0% from 6.9%.
- Credit Card segment profit rose to $541 million from $201 million, principally as bad debt expense fell to $528 million from $1.185 billion. Segment revenue declined 16.5% to $1.604 billion.
- Gross credit card receivables declined 14.3% to $6.843 billion. The allowance for doubtful accounts fell to $690 million from $1.016 billion; net write-offs were 12.0% of average receivables, down from 14.1%.
- Capital expenditures were $2.129 billion. Target paid $609 million in dividends and repurchased 47.8 million shares for $2.508 billion. It issued $1 billion of long-term debt at 3.875%, maturing in 2020, and repaid $2.259 billion of debt.
- The $2 billion revolving credit facility was undrawn, and no commercial paper was outstanding at year-end. The SEC interest coverage ratio was 6.1x, compared with 5.1x in FY2009.
Material changes versus the prior comparable period
- Revenue, earnings and EPS improved; retail comparable-store sales returned to growth after declines in FY2009.
- Credit Card profitability rebounded sharply as delinquency indicators and bad debt expense improved, although receivables and credit revenue continued to contract.
- Operating cash flow decreased by $610 million, while capital spending, share repurchases and dividends increased. Cash at year-end fell by $488 million.
- Target remodeled 341 stores, compared with 67 in FY2009, and opened 13 new stores versus 76 the prior year.
- Target declared dividends of $0.92 per share, up from $0.67. The effective tax rate declined to 35.1% from 35.7%, including approximately $100 million of tax benefits from favorable resolutions of tax matters.
Outlook, commentary and risks
- For 2011, management expected comparable-store sales growth of 4%–5% and a full-year Retail EBIT margin rate consistent with FY2010. Management anticipated modest margin pressure in spring and modest favorability in fall.
- Management expected credit card receivables and the related allowance to continue declining, with receivables’ decline moderating during the year; portfolio profitability measures were expected to remain strong.
- Target agreed to pay C$1.825 billion for leasehold interests in up to 220 Canadian sites, with plans for 100–150 stores, primarily opening in 2013. Renovation investment was expected to exceed C$1 billion. Management estimated an unfavorable 2011 EPS impact of $0.15–$0.20 and expected greater dilution in 2012.
- Management forecast U.S. retail capital expenditures of approximately $2.5 billion, 21 store openings, and $1.5–$2.0 billion of share repurchases in 2011. The expected effective tax rate was 36%–37%. Management said liquidity should be adequate for operations and planned initiatives.
- Target announced it would actively pursue a sale of its credit card receivables portfolio; no completed sale is reported in this filing.
- Key risks include U.S. economic and consumer-spending weakness, retail competition and changing preferences, credit losses, supply-chain disruption, labor and regulatory costs, data security and systems interruptions, and execution of the Canadian expansion. Target also planned to migrate Target.com from Amazon-operated infrastructure to its own platform in 2011.
- A California hazardous-waste case settled for $22.5 million plus an injunction; court approval and judgment followed in March 2011. An EPA investigation concerning alleged asbestos-related Clean Air Act violations at 36 remodeled stores remained ongoing, with no specific relief sought to date.
- Auditors issued an unqualified opinion on the financial statements and internal controls; management reported effective internal control over financial reporting.
Investor verification priorities
- Confirm the reporting-period basis: this is FY2010, ended January 29, 2011, despite the request metadata identifying “2009 Q4.”
- Track whether projected 2011 comparable-store growth, margin performance, capital spending and share repurchases were achieved.
- Assess the Canadian acquisition, renovation funding, store-opening schedule and stated EPS dilution against subsequent disclosures.
- Verify the outcome and terms of any credit card receivables sale, and monitor portfolio contraction, delinquency trends, allowance adequacy and write-offs.
- Review debt maturities, liquidity needs, and the potential costs or outcomes of the EPA investigation and other legal or tax contingencies.