Target Corporation 10-Q Summary
Period: Quarter and six months ended July 31, 2010, compared with periods ended August 1, 2009. The request metadata says “2009 Q2,” but the supplied filing is for 2010 Q2.
Business context and results
Target operates Retail and Credit Card segments. Management said second-quarter earnings exceeded expectations in both segments. Retail benefited from higher sales; Credit Card profit rose as bad-debt expense declined.
Key financial metrics
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $15.532 billion | $15.067 billion | $31.124 billion | $29.900 billion |
| Net earnings | $679 million | $594 million | $1.350 billion | $1.116 billion |
| Diluted EPS | $0.92 | $0.79 | $1.82 | $1.48 |
| Operating cash flow | Not separately provided | Not separately provided | $1.828 billion | $2.051 billion |
| Capital expenditures | $584 million | $502 million | $991 million | $1.042 billion |
- Retail: Q2 sales rose 3.8%, including 1.7% comparable-store growth. Six-month sales rose 4.7%, with comparable-store growth of 2.2%. Q2 gross margin rate was 32.0% versus 31.9%; EBIT margin was 7.2% versus 7.3%. Six-month EBIT margin improved to 7.3% from 7.0%.
- Credit Card: Q2 segment profit increased to $149 million from $63 million; six-month profit rose to $260 million from $101 million. Lower bad-debt expense was the primary driver. Credit Card revenue declined 18.8% in Q2 and 13.6% year to date.
- Cash and liquidity: Cash and cash equivalents were $1.540 billion at July 31, 2010, down from $2.200 billion at January 30, 2010. Current assets were $17.245 billion and current liabilities $10.100 billion. A $2 billion revolving credit facility was available, with no amounts outstanding.
- Debt: Total debt and borrowings were approximately $16.519 billion, comprising $12.475 billion unsecured debt and $4.077 billion nonrecourse debt. The filing’s separate fair-value note reports total debt of $16.135 billion on a defined basis; verify the differing scope. Target issued $1 billion of 3.875% debt due 2020 and retired $900 million of nonrecourse debt in April. Management said it expected to remain within debt covenants.
- Margins and expenses: Consolidated earnings before interest and taxes were $1.266 billion in Q2 and $2.508 billion for six months. Net interest expense declined 4.6% in Q2 and 6.0% for six months year over year.
Material changes versus prior periods
- Net earnings increased 14% in Q2 and 21% for the first half; diluted EPS rose from $0.79 to $0.92 and from $1.48 to $1.82, respectively. Lower weighted-average shares also supported EPS.
- Retail comparable-store sales shifted from declines of 6.2% in Q2 2009 and 5.0% in the first half of 2009 to growth of 1.7% and 2.2% in 2010.
- Credit Card gross receivables fell 15.7% year over year to $6.988 billion. Q2 bad-debt expense declined to $138 million from $303 million; six-month expense declined to $335 million from $600 million.
- Operating cash flow decreased to $1.828 billion from $2.051 billion. Financing cash outflow included $1.285 billion of share repurchases, versus none reported in the comparable 2010-period cash-flow line for 2009.
- Target repurchased 25.1 million shares for $1.301 billion in the first half and paid $252 million in dividends. The allowance for credit-card losses was $851 million, compared with $1.004 billion a year earlier.
Outlook, risks and unusual items
- Management expected comparable-store sales growth of 1%–3% in Q3 and somewhat faster growth in Q4. It expected to generally maintain or slightly increase Retail EBITDA and EBIT margin rates in the second half, while noting remodels and rewards initiatives could carry lower margins.
- The new 5% REDcard discount program was planned for October 2010. Management expected it to contribute about one percentage point to Q4 sales, but warned it could reduce gross margin; the filing identifies the risk that incremental sales may not offset discounts.
- Credit Card segment profit was expected to increase in the second half, but more slowly than in the first half. Management expected lower Q3 late-fee income under new federal regulations and further declines in gross receivables.
- Management forecast 2010 capital expenditures of about $2.0 billion, with roughly half for 340 store remodels expected to be completed by October. Share repurchases were expected to continue, subject to market conditions, earnings and cash flow.
- Credit risks include continued receivables contraction, underwriting changes and lower card usage. Receivables 90 days or more past due and still accruing were $246 million; 6.3% of period-end gross receivables were classified as troubled-debt restructurings.
- Target disclosed California hazardous-waste litigation and an EPA investigation concerning alleged asbestos-related Clean Air Act violations. It expected potential monetary penalties in each matter to exceed $100,000, but did not expect either to be material to financial position, results or cash flows. The company said reserves for ordinary-course claims were adequate.
- Up to $55 million of unrecognized tax benefits might be recognized within 12 months, potentially reducing tax expense by a similar amount. The first-half filing of a tax accounting method change reduced the unrecognized-tax-benefit liability by $130 million with virtually no effect on tax expense.
- Management stated that disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. It noted no material change in market-risk exposures from the prior annual filing.
Important facts for investors to verify
- Confirm the reporting-period mismatch: the supplied filing covers Q2 2010, not Q2 2009.
- Assess whether REDcard discount-driven sales growth can offset its expected margin impact once broadly implemented.
- Track credit-card receivables, delinquency trends, write-offs, allowance adequacy and the pace of segment-profit improvement.
- Reconcile debt totals by balance-sheet classification and the narrower debt definition used in the fair-value disclosure; monitor liquidity and covenant compliance.
- Evaluate cash generation against planned capital spending, dividends and continued share repurchases.
- Monitor the progress and potential financial outcome of the California and EPA matters; management’s materiality assessment is an estimate.