Target Corporation — Form 10-K Summary
Period: Fiscal 2015, the 52 weeks ended January 30, 2016. The filing also reports fourth-quarter results. The request labels the period “2014 Q4,” but the filing covers fiscal 2015; its fourth quarter ended January 30, 2016.
Business context
Target operates as a U.S. general merchandise retailer through stores and digital channels. It exited Canada in January 2015; Canadian results are reported as discontinued operations. In December 2015, Target sold its pharmacy and clinic businesses to CVS, which now operates them in Target stores under a long-term agreement.
Financial performance and liquidity
| Metric | Fiscal 2015 | Prior period |
|---|---|---|
| Sales | $73.785 billion | $72.618 billion; up 1.6% |
| Comparable sales | Up 2.1% | Up 1.3% |
| Digital sales growth | More than 30%; contributed 0.8 percentage points to comparable-sales growth | Digital contribution was 0.7 percentage points |
| Net earnings from continuing operations | $3.321 billion | $2.449 billion |
| GAAP diluted EPS from continuing operations | $5.25 | $3.83 |
| Adjusted diluted EPS from continuing operations | $4.69 | $4.22 |
| Gross margin rate | 29.5% | 29.4% |
| EBITDA margin rate | 9.9% | 9.4% |
| Segment EBIT | $5.127 billion | $4.708 billion |
| Operating cash flow, continuing operations | $5.140 billion | $5.131 billion |
| Capital expenditures | $1.438 billion | $1.786 billion |
| Cash and cash equivalents | $4.046 billion | $2.210 billion |
| Long-term debt, including current portion | $12.760 billion | $12.725 billion |
Current assets were $14.130 billion and current liabilities were $12.622 billion at year-end. Target paid $1.362 billion in dividends and repurchased $3.441 billion of shares during fiscal 2015. The pharmacy and clinic sale generated $1.875 billion of cash proceeds and a $620 million pretax gain. The reported continuing-operations EPS includes the transaction gain; adjusted EPS excludes it and other specified items.
Material changes and fourth-quarter results
- Fourth-quarter sales were $21.626 billion, versus $21.751 billion a year earlier. Fourth-quarter continuing-operations net earnings were $1.421 billion, compared with $960 million; the quarter included the $620 million pharmacy and clinic sale gain.
- The pharmacy and clinic sale reduced reported sales by about $550 million in fiscal 2015. Management said that, on a comparable basis, removing those businesses would have reduced reported sales and cost of sales by approximately $3.8 billion and $3.1 billion, respectively, without notable impact on EBITDA or EBIT.
- Gross margin improved, primarily from favorable category mix and less promotional activity than in the highly promotional period following the 2013 data breach. Lower SG&A expense rate reflected cost savings and reduced marketing expense, partly offset by investments.
- Cash from continuing operations was nearly flat year over year. Year-end cash increased mainly because the CVS sale proceeds had not yet been fully deployed. Inventory rose to $8.601 billion from $8.282 billion.
- Net earnings in fiscal 2014 included a $4.085 billion loss from discontinued operations, primarily related to the Canada exit; fiscal 2015 reported $42 million of income from discontinued operations.
Outlook, risks, and unusual items
- Management expected fiscal 2016 capital expenditures to return to a level comparable with fiscal 2013 and 2014; the filing does not provide specific revenue or EPS guidance.
- CVS was expected to make annual, inflation-adjusted occupancy-related payments to Target, starting at $20 million to $25 million in the first year. Management expected the transaction to be EPS-accretive after closing and to improve ROIC over time.
- Target reported an unused $2.25 billion revolving credit facility, no commercial paper outstanding at year-end, and stated it expected to remain in compliance with debt covenants. It said liquidity should be adequate for operations, investment, Canada-exit obligations, dividends, and repurchases.
- Canada-related exposures remain subject to liquidation and guarantee settlements. A March 2016 agreement with former landlords remained subject to creditor and court approval; if not approved, future changes in estimated losses could be material, and the company could not estimate the excess-loss range.
- The 2013 data breach continued to involve litigation and government investigations. Year-end accrued liabilities were $80 million, with a $20 million insurance receivable; Target reported cumulative net breach costs of $201 million.
- Other principal risks include intense retail competition, execution of digital and technology initiatives, data security, consumer demand and U.S. economic conditions, supply-chain disruption, labor costs, and reliance on CVS and other third parties. A California Attorney General letter alleged environmental-law and injunction noncompliance; no formal action had been commenced as of the filing.
- Target recorded $138 million of headquarters restructuring costs and a $43 million pension-related curtailment gain. Ernst & Young issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile GAAP EPS of $5.25 from continuing operations with adjusted EPS of $4.69, including the CVS gain and other adjustments.
- Track comparable sales, digital growth, and margins after the pharmacy and clinic business transfer and associated reduction in reported sales.
- Review the final settlement and recovery amounts for Canada-exit guarantees and the remaining liquidation process.
- Monitor data-breach litigation, insurance recoveries, and any changes to accrued liabilities.
- Assess the pace and returns of planned capital spending, share repurchases, and dividends relative to debt and operating cash generation.