Target Corporation — Form 10-Q Summary
Reporting period: Quarter ended April 30, 2011; comparable quarter ended May 1, 2010. The filing is for 2011 Q1, notwithstanding the request metadata identifying 2010 Q1. Amounts are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenues | $15,935 | $15,593 | Up 2.2% |
| Earnings before interest and taxes | $1,264 | $1,242 | Up 1.8% |
| Net earnings | $689 | $671 | Up 2.7% |
| Diluted EPS | $0.99 | $0.90 | Up $0.09 |
| Operating cash flow | $1,052 | $1,158 | Down $106 |
U.S. Retail sales rose 2.8%, including comparable-store sales growth of 2.0% versus 2.8% a year earlier. Retail gross margin rate declined to 30.4% from 31.3%; EBITDA margin fell to 10.1% from 10.7%, and EBIT margin to 6.8% from 7.3%. Management attributed most of the gross-margin decline to the 5% REDcard Rewards program and expanded food assortment, with the balance primarily from clearance and competitive markdowns.
U.S. Credit Card segment profit increased to $194 from $111, chiefly because bad debt expense fell to $12 from $197 as portfolio risk measures improved. Credit card revenue declined 18.3% to $355, reflecting lower average receivables and lower late-fee revenue. Gross card receivables were $6,286 at quarter-end, down 13.4% year over year; delinquency and net write-off measures also improved.
Cash, debt and liquidity
- Cash and cash equivalents were $1,424 at April 30, 2011, versus $1,578 a year earlier. Operating cash flow of $1,052 funded $632 of property and equipment expenditures; investing cash outflow was $370.
- Financing cash outflow was $970, including $812 of share repurchases and $174 of dividends paid. Cash declined $288 during the quarter.
- At quarter-end, unsecured debt and other borrowings were $11,764 in total, and nonrecourse debt secured by credit-card receivables was $3,965. The company had no commercial paper outstanding and no borrowings under its $2 billion revolving credit facility, which expires in April 2012.
- Current assets were $16,368 and current liabilities $10,838. Interest coverage was 6.0x, compared with 5.9x in the prior-year quarter. Management said it expected to remain in compliance with debt covenants and considered liquidity adequate for operations and planned initiatives.
Material changes and strategic developments
- Target repurchased 15.4 million shares for $819, averaging $53.32 per share, compared with 7.5 million shares for $394 in the prior-year quarter. It declared dividends of $0.25 per share, up from $0.17.
- Target began reporting a Canadian segment after agreeing to acquire leasehold interests in up to 220 Zellers sites for C$1.825 billion. It had selected 105 sites and planned to open 100 to 150 Canadian stores, primarily in 2013. Canadian start-up costs were $11 in the quarter.
- Target planned to invest $1.8 billion to $2.3 billion over three years in Canadian store renovations, supply chain and technology infrastructure. A $189 payment to JPMorgan Chase related to credit-card receivables was made on May 25, 2011, after quarter-end.
Outlook, risks and contingencies
- Management expected U.S. comparable-store sales to accelerate as the year progressed. It estimated remodels could add 1.5 percentage points and REDcard Rewards up to 2 percentage points to same-store sales growth later in 2011. These programs were expected to moderate gross margins, generally offset by a declining SG&A rate.
- For the credit-card segment, management expected average receivables to remain around $6 billion for the rest of 2011, the allowance to continue declining, and pretax return on invested capital to be at least 20%. Target was pursuing a possible receivables-portfolio sale, potentially in late 2011, only if strategic and financial conditions were acceptable.
- Target expected a $0.16 to $0.20 unfavorable 2011 EPS impact from direct Canadian-entry costs, with a larger dilutive impact in 2012. It forecast U.S. retail capital expenditures of $2.3 billion to $2.7 billion, 21 U.S. store openings, and $1.5 billion to $2.0 billion of 2011 share repurchases, subject to market conditions, cash flows and the receivables-sale effort. Expected 2011 effective tax rate was 36% to 37%.
- Risks include seasonality, economic deterioration affecting cardholder repayment and bad debt, access to capital markets and credit ratings, and execution and cost uncertainty in Canada. The filing said risk factors were unchanged from the 2010 Form 10-K. Management considered recorded litigation reserves adequate and did not expect identified claims to materially affect results, cash flows or financial condition.
- The filing states disclosure controls were effective and reports no material changes in internal control over financial reporting. Management cautioned that quarterly results may not indicate full-year performance because of seasonality.
Investor facts to verify
- Progress, pricing and strategic terms of any credit-card receivables sale, including effects on funding and earnings.
- Final number and costs of Zellers sites selected, required Canadian investment, opening schedule and projected EPS dilution.
- Whether REDcard Rewards and store remodels deliver expected sales growth while containing margin pressure.
- Credit-card receivables quality, allowance adequacy, delinquencies and net write-offs as the portfolio changes.
- Cash generation, debt-market access and planned repurchases and dividends in light of Canadian expansion spending.