Business context and reporting period
Target Corporation’s filing covers the three months ended May 3, 2014, and reports its U.S. and Canadian retail segments. The request labels the period “2013 Q1,” but the filing is for first quarter 2014; the comparable quarter ended May 4, 2013.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Sales | $17.050 billion | $16.706 billion |
| Net earnings | $418 million | $498 million |
| Diluted EPS, GAAP | $0.66 | $0.77 |
| Diluted EPS, adjusted | $0.70 | $0.82 |
| Cash provided by operations | $520 million | $3.230 billion |
| Capital expenditures | $561 million | $901 million |
- Sales rose 2.1%, while net earnings fell 16.1%. Reported earnings before interest and taxes were $811 million, versus $1.408 billion.
- U.S. sales were $16.657 billion, up 0.2%; comparable sales declined 0.3%. U.S. segment EBIT was $1.072 billion, down 13.5%, and its gross margin rate fell to 29.5% from 30.7%.
- Canadian sales were $393 million, compared with $86 million, as the store base expanded to 127. The Canadian segment reported an EBIT loss of $211 million.
- Net interest expense was $170 million, compared with $629 million. The prior-year figure included a $445 million debt-extinguishment loss.
- Cash and cash equivalents were $715 million at May 3, 2014, versus $1.819 billion a year earlier. Current assets were $11.023 billion and current liabilities $12.040 billion. Long-term debt and other borrowings were $12.612 billion; the current portion was $1.477 billion.
- Target paid $272 million in dividends, or $0.43 per share. No shares were repurchased in the quarter for investment purposes.
Material changes versus the prior comparable period
- Prior-year operating cash flow included $2.7 billion of proceeds from the sale of U.S. credit-card receivables; therefore, the year-over-year cash-flow decline is not directly comparable to underlying operations.
- The 2013 quarter included a $391 million gain on the receivables sale, while 2014 did not. Target now earns profit-sharing income from TD; the U.S. segment recorded $167 million in the quarter, versus $105 million in the prior-year quarter.
- Adjusted diluted EPS declined 13.9%, from $0.82 to $0.70. The measure excludes specified items and is non-GAAP.
- Standard & Poor’s lowered Target’s long-term debt rating from A+ to A during the quarter; its A-1 commercial-paper rating was maintained.
Outlook, risks and unusual items
- The filing provides no specific earnings or sales guidance. Management said liquidity should remain adequate for operations, investment, debt maturities, dividends, and data-breach obligations, and expected continued access to commercial paper and long-term financing.
- Target expected REDcard penetration growth to remain slower in 2014 than before the breach. U.S. REDcard sales penetration was 20.4%, up from 17.1%; comparable sales improved from a 0.6% decline to a 0.3% decline.
- Target accelerated approximately $100 million of investment in chip-enabled payment technology. It expected upgraded readers in all U.S. stores by September 2014 and chip-and-PIN-enabled REDcards and acceptance beginning in early 2015.
- The data breach affected approximately 40 million payment-card accounts and exposed certain information for up to 70 million individuals. First-quarter net breach expense was $18 million; cumulative net expense was $35 million. A $52 million liability and $39 million insurance receivable were reported at May 3.
- More than 100 lawsuits and multiple government investigations related to the breach were pending or anticipated. Target said additional losses could be material, but it could not estimate a loss range; expected counterfeit-fraud claims were not included in the recorded accrual because they were not reasonably estimable. Significant future legal and professional expenses were expected. Network-security insurance coverage is $100 million above a $10 million deductible.
- Target reported an unused $2.25 billion revolving credit facility expiring in October 2018 and said it expected to remain in compliance with debt covenants. The filing states that disclosure controls were effective and that there were no material changes to internal control over financial reporting.
Key facts for investors to verify
- Confirm the reporting-period designation: the filing is for the quarter ended May 3, 2014, not 2013 Q1.
- Track data-breach claims, investigations, insurance recoveries, and whether additional losses become estimable or require accrual.
- Assess U.S. comparable-sales and margin trends, including promotional markdowns and REDcard-related effects.
- Monitor Canadian operating losses, store performance, and progress toward scale.
- Review liquidity, debt maturities, credit ratings, and the sustainability of dividends and planned investment.
- Compare GAAP results with management’s adjusted EPS and its stated exclusions.