Target Corporation — Form 10-Q Summary
Reporting period: The filing covers the three months ended April 28, 2012, compared with the three months ended April 30, 2011. The request metadata says “2011 Q1,” but the filing itself reports first quarter 2012.
Business context and results
Target reports U.S. Retail, U.S. Credit Card, and Canadian segments. Results reflect stronger U.S. retail sales, weaker credit-card segment profit, and higher Canadian start-up costs. Management cautions that the business is seasonal and quarterly results may not indicate full-year performance.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Total revenue | $16.867 billion | $15.935 billion |
| EBIT | $1.285 billion | $1.264 billion |
| Net earnings | $697 million | $689 million |
| Diluted EPS | $1.04 | $0.99 |
| Operating cash flow | $1.307 billion | $1.052 billion |
| Capital expenditures | $829 million | $632 million |
- Revenue increased 5.9%; net earnings rose 1.2%; reported diluted EPS increased 5.0%. Adjusted diluted EPS, a non-GAAP measure, was $1.11 versus $0.99, up 11.5%. The $0.07 adjustment reflects Canadian market-entry costs and favorable resolution of tax matters.
- U.S. Retail sales rose 6.1%, including comparable-store sales growth of 5.3% versus 2.0%. Retail EBIT increased 12.9% to $1.199 billion.
- U.S. Retail gross margin rate was 30.2% versus 30.4%; SG&A rate improved to 19.9% from 20.4%. EBIT margin improved to 7.3% from 6.8%.
- Credit-card segment profit fell to $139 million from $194 million. Revenue decreased 7.1% to $330 million, while expenses rose 32.6% to $189 million, principally reflecting higher bad-debt expense and comparison with a prior-year reserve reduction.
- Canadian segment reported a $55 million loss before interest and taxes, versus an $11 million loss; this included $34 million of start-up costs and $21 million of depreciation.
- Cash and cash equivalents were $675 million at quarter-end, compared with $1.424 billion a year earlier. Current assets were $15.591 billion and current liabilities $12.446 billion.
- Balance-sheet debt categories at April 28 comprised $2.483 billion current unsecured debt and borrowings, $13.467 billion noncurrent unsecured debt and borrowings, and $1.5 billion noncurrent nonrecourse debt backed by credit-card receivables. The filing’s separate fair-value table reports $15.630 billion of debt under its stated measurement definition.
- Target repurchased 10.5 million shares for $604 million and paid $201 million in dividends. Quarterly dividends declared were $0.30 per share, up from $0.25.
Changes, liquidity, outlook, and risks
- Operating cash flow improved year over year, while investing outflows increased with higher capital expenditures. Financing outflows included debt repayments, dividends, and share repurchases; cash declined by $119 million during the quarter.
- Target had $450 million of commercial paper outstanding at quarter-end and a $2.25 billion revolving credit facility expiring in October 2016, with no facility borrowings during the quarter. Management said liquidity sources should be adequate for operations, planned expansion, dividends, and the share-repurchase program through 2012.
- Management intends to pursue a sale of the credit-card receivables portfolio, but says it will proceed only if strategic and financial conditions are appropriate. The portfolio was not yet classified as held for sale.
- Credit-card receivables were $5.943 billion, down 5.4% year over year. Delinquent accounts of 30 or more days were 3.9% of gross receivables versus 4.9%; the allowance was $395 million, or 6.6% of gross receivables, versus $565 million, or 9.0%. Management notes that weaker U.S. economic conditions could increase credit losses.
- Management reported no material changes to previously disclosed risk factors or market-risk exposures. It believes identified litigation reserves are adequate and does not expect currently identified claims to materially affect results, cash flows, or financial condition.
- Credit ratings were Moody’s A2/P-1, S&P A+/A-1, and Fitch A-/F2 for long-term debt/commercial paper. Management cautioned that a downgrade could affect debt-market access and borrowing costs. It expected covenant compliance.
- There was no numerical full-year earnings or sales guidance in the provided filing text. Management identified uncertainty around the credit-card portfolio sale, Canadian entry and performance, credit losses, liquidity costs, tax matters, and litigation outcomes.
Important facts for investors to verify
- Whether U.S. retail comparable-store growth and improved expense leverage continue, and how the 5% REDcard discount and remodel program affect margins.
- Credit-card portfolio delinquency, charge-offs, allowance adequacy, and progress and terms of any proposed portfolio sale.
- Canadian expansion spending, lease-related costs, and the pace at which the segment may reduce start-up losses.
- Debt and liquidity needs alongside continued share repurchases and dividend growth; note the filing’s differing debt totals and definitions.
- The composition and sustainability of the $0.07-per-share adjustment underlying adjusted EPS, including the tax resolution and Canadian entry costs.