Target Corporation — Form 10-Q Summary
Reporting period: Three months ended May 1, 2010, compared with the three months ended May 2, 2009. The supplied metadata says “2009 Q1,” but the filing itself reports first-quarter fiscal 2010.
Business context and results
Target operates retail stores and a credit card business. Management said quarterly results were better than expected in both segments. Retail growth reflected higher comparable-store sales and new-store contributions in the prior-year comparison; Credit Card earnings benefited chiefly from lower bad-debt expense.
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Sales | $15.158 billion | $14.361 billion | +5.5% |
| Total revenues, including credit card revenue | $15.593 billion | $14.833 billion | +5.1% |
| Net earnings | $671 million | $522 million | +28.5% |
| Diluted EPS | $0.90 | $0.69 | +$0.21 |
| Operating earnings before interest and taxes | $1.242 billion | $1.026 billion | +21.1% |
| Cash flow from operations | $1.158 billion | $999 million | +$159 million |
Financial position, cash flow and liquidity
- Retail comparable-store sales rose 2.8%, versus a 3.7% decline a year earlier. Retail gross margin rate improved to 31.3% from 30.8%; SG&A rate improved to 20.6% from 20.9%. Retail EBIT margin was 7.3%, up from 6.7%.
- Credit Card segment profit increased to $111 million from $39 million, despite revenue declining to $435 million from $472 million. Bad-debt expense fell to $197 million from $296 million.
- Gross credit card receivables declined 14.2% year over year to $7.260 billion. The allowance was $930 million, or 12.8% of gross receivables, versus $1.005 billion, or 11.9%, a year earlier. Annualized net write-offs rose to 15.0% from 13.9% of average gross receivables.
- Cash and cash equivalents were $1.578 billion at May 1, 2010, down from $2.200 billion at fiscal year-end. Current assets were $17.222 billion and current liabilities were $10.197 billion.
- Total debt was $15.291 billion carrying value; estimated fair value was $16.659 billion. The company repaid $1.170 billion of long-term debt during the quarter, including retirement at par of $900 million in credit-card-backed nonrecourse debt. It reported no commercial paper outstanding.
- Operating cash flow funded $407 million of capital expenditures, $378 million of share repurchases and $126 million of dividends; cash used in financing was $1.605 billion. A $2 billion committed revolving credit facility, expiring April 2012, was unused.
- Credit ratings were A2 (Moody’s), A+ (S&P) and A (Fitch) for long-term debt. Management said the company was in compliance with debt covenants and expected to remain so.
Material changes and management outlook
- Retail sales growth reflected 2.8% comparable-store growth and new-store contributions; no stores opened or closed in the quarter. Management attributed margin improvement to merchandise-category performance and store productivity.
- Credit card receivables continued to contract amid tighter underwriting, reduced credit lines for higher-risk customers, fewer new accounts, improved payment rates and lower card usage. Target stopped issuing new Target Visa cards effective April 29, 2010; existing Visa cardholders were unaffected.
- Management expected 2010 comparable-store sales growth of 2%–4%, including an estimated one-percentage-point contribution from remodels, and total sales growth in the mid-single digits. It expected a slight decline in Retail gross margin rate, offset by lower SG&A rate, and generally expected to preserve the 2009 Retail EBIT margin rate.
- For Credit Card, management expected receivables to continue declining and bad-debt expense to improve year over year. It expected to continue share repurchases and forecast 2010 capital expenditures of $2.0–$2.5 billion.
- Management noted the business is seasonal and quarterly results are not necessarily indicative of full-year results. Outlook statements are forward-looking and subject to the risks described in the company’s 2009 Form 10-K.
Risks, contingencies and unusual items
- Credit-card funding includes nonrecourse obligations secured by receivables. Target’s agreement with a JPMorgan Chase affiliate includes receivables-performance triggers that can require changes to underwriting or collections; failure to implement required actions could accelerate repayment, payable only from trust assets. Target reported repayments to the affiliate of $268 million in April 2010 and a further $67 million on May 25, 2010.
- Target reported a $338 million unrecognized tax-benefit liability and said up to $55 million could be recognized within 12 months, potentially reducing tax expense by approximately the same amount.
- Two disclosed environmental matters—the California hazardous-waste lawsuit and an EPA investigation concerning alleged asbestos-related Clean Air Act violations—could involve penalties above $100,000. The company did not expect either to materially affect its financial position, results or cash flows. Management said reserves for ordinary-course claims and litigation were adequate and did not expect identified matters to have a material effect.
- The company implemented a new general ledger system in the first quarter as part of a multiyear SAP financial-systems program. Management said controls affected by implementation were evaluated and found adequate; disclosure controls were deemed effective.
- Share repurchases totaled 7.5 million shares for $394 million in the quarter. Since the program began, 111.1 million shares had been repurchased for $5.713 billion, with approximately $4.287 billion remaining under authorization at quarter-end.
Investor verification points
- Verify the reporting-period label: the filing covers Q1 2010, not Q1 2009.
- Monitor whether retail sales and comparable-store growth meet the 2010 outlook, and whether gross-margin pressure is offset by expense leverage.
- Track credit-card receivables, delinquencies, allowance coverage and net write-offs; the lower bad-debt expense coexisted with a higher annualized net write-off rate.
- Review cash generation against planned capital spending, debt repayments, dividends and share repurchases, including liquidity and covenant headroom.
- Follow resolution of the tax positions and environmental matters, and assess any effect on earnings, cash flow or reported liabilities.