Target Corporation — Form 10-Q Summary
Period clarification: The request identifies “2010 Q2,” but the filing is for the quarter and six months ended July 30, 2011, compared with periods ended July 31, 2010. Figures below are in millions of dollars except per-share data, percentages, and where noted.
Business context and reporting period
Target operated U.S. retail and credit-card businesses and began reporting a Canadian segment in 2011 following its agreement to acquire Zellers leasehold interests. Management cautions that results are seasonal and quarterly performance may not indicate full-year results.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenues | $16,240 | $15,532 | $32,175 | $31,124 |
| EBIT | $1,300 | $1,266 | $2,564 | $2,508 |
| Net earnings | $704 | $679 | $1,393 | $1,350 |
| Diluted EPS | $1.03 | $0.92 | $2.02 | $1.82 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $2,336 | $1,828 |
| Capital expenditures | Not presented quarterly | Not presented quarterly | $2,379 | $991 |
Q2 sales were $15,895, up 5.1%; comparable-store sales increased 3.9%. Q2 U.S. Retail gross margin was 31.6%, down from 32.0%, while EBIT margin was 7.2%, unchanged. Net interest expense was $191 for the quarter and $374 year to date. The effective tax rate was 36.5% for Q2 and 36.4% year to date.
At July 30, 2011, cash and cash equivalents were $890, total current assets $16,059, total current liabilities $11,620, and total debt carrying value $16,035. Debt fair value was $17,931. Cash declined by $822 during the first half. Target reported $2 billion of available revolving credit capacity, with no borrowings outstanding, and a 6.0x first-half interest coverage ratio. Credit ratings were Moody’s A2, S&P A+, and Fitch A- for long-term debt.
Credit-card gross receivables were $6,202, down 11.2% from a year earlier; the allowance was $480, or 7.7% of gross receivables. Delinquent accounts (30+ days past due) were $289, versus $509 a year earlier. Net write-offs were 7.5% of average gross receivables on an annualized first-half basis, down from 13.7%.
Material changes versus prior comparable periods
- Q2 revenue increased 4.6% and net earnings increased 3.7%; diluted EPS rose from $0.92 to $1.03, helped by lower weighted-average shares following repurchases.
- U.S. Retail sales rose 5.1% in Q2, including 3.9% comparable-store growth. Gross margin contracted, while SG&A rate improved slightly.
- Credit-card segment profit increased to $171 in Q2 and $365 year to date, principally as bad-debt expense fell; credit-card revenue declined 15.0% in Q2 and 16.7% year to date.
- First-half operating cash flow increased to $2,336, but capital expenditures rose sharply to $2,379. Target repurchased $1,507 of shares and paid $346 of dividends in the first half.
- The Canadian lease transaction added $2,393 of capital-lease assets and $1,012 of capital-lease obligations in Q2. Total assets were $45,499, versus $43,655 a year earlier.
Outlook, management commentary, risks and unusual items
- Management forecast diluted EPS of $0.70–$0.75 for Q3 2011 and $4.15–$4.30 for full-year 2011. The outlook excludes any credit-card portfolio sale.
- Management said second-half EPS performance depends importantly on comparable-store sales: results likely at or above the midpoint if Q3 and Q4 growth meets or exceeds Q2’s 3.9%. It expected moderate gross-margin declines, generally offset by lower SG&A rates.
- Target expected credit-card receivables to remain around $6 billion for the balance of 2011 and the allowance to continue declining, but more slowly than earlier in the year. It was negotiating with potential buyers to sell the portfolio, but would proceed only if strategic and financial conditions were met.
- Canadian expansion was expected to reduce 2011 EPS by $0.16–$0.20 and 2012 EPS by $0.45–$0.50. Target planned $2–$3 billion of Canadian investment over three years and expected to open 125–135 stores, primarily during 2013. It owed Zellers the remaining C$912.5 million purchase price in Q3 2011.
- Other expectations included U.S. retail capital expenditures of $2.5–$2.7 billion in 2011, a 36%–37% effective tax rate, and continued share repurchases. The company had reached the low end of its expected annual repurchase range of $1.5–$2.0 billion.
- Material exposures include consumer-credit deterioration, retail demand and margin pressure, access to debt markets and potential rating changes, Canadian execution and lease costs, and foreign-exchange and market risks. Management said current litigation reserves were adequate and did not expect identified claims to be material. It reported no material risk-factor changes from its 2010 Form 10-K.
- A potential early repayment of the JPMC credit-card-related note during the specified 2011–2012 window would require an $85–$103 million make-whole premium. Management stated that liquidity sources were adequate for operations and planned initiatives; the revolving facility expires in April 2012.
Important facts for investors to verify
- Confirm the intended reporting period: this filing covers Q2 2011, not Q2 2010.
- Track comparable-store sales and retail gross-margin trends against the assumptions underlying full-year EPS guidance.
- Assess credit-card portfolio quality, allowance adequacy, receivables trends, and the terms and timing of any proposed portfolio sale.
- Review the funding and cash-flow implications of elevated capital spending, share repurchases, dividends, and the remaining Canadian transaction payments and commitments.
- Check subsequent disclosures on Canadian store selection, lease obligations, expansion costs, and expected opening schedule.