Target Corporation — Form 10-Q Summary
Period and context: The filing covers the quarter ended October 31, 2015, and the first nine months of fiscal 2015. The request metadata says “2014 Q3,” but the filing itself reports 2015 Q3; its principal comparison is the quarter ended November 1, 2014. Target reported one continuing-operations segment. Canadian operations are presented as discontinued operations.
Financial performance
| Metric | Q3 2015 | Q3 2014 | First nine months 2015 | First nine months 2014 |
|---|---|---|---|---|
| Sales | $17.613 billion | $17.254 billion | $52.159 billion | $50.868 billion |
| Continuing-operations net earnings | $476 million | $526 million | $1.900 billion | $1.489 billion |
| Diluted EPS from continuing operations | $0.76 | $0.82 | $2.98 | $2.33 |
| Adjusted diluted EPS from continuing operations (non-GAAP) | $0.86 | $0.79 | $3.18 | $2.72 |
| Total net earnings, including discontinued operations | $549 million | $352 million | $1.937 billion | $1.004 billion |
| Operating cash flow from continuing operations | Not separately stated for quarter | Not separately stated for quarter | $2.956 billion | $2.599 billion |
Q3 comparable sales rose 1.9%, including 1.4% growth in stores and a 0.4 percentage-point contribution from digital. Digital sales increased 20%. For the first nine months, comparable sales increased 2.2%.
- Margins: Q3 gross margin was 29.4%, down from 29.5%; SG&A rate improved to 20.7% from 21.1%. Segment EBITDA margin was 8.6% versus 8.4%, and segment EBIT margin was 5.5% versus 5.3%. For the first nine months, gross margin was 30.2% versus 29.8%, and segment EBIT margin was 6.8% versus 6.1%.
- Cash flow and investment: Nine-month capital expenditures were $1.129 billion. Cash provided by all operations was $3.760 billion, including $804 million from discontinued operations; cash at period-end was $1.977 billion, compared with $718 million at November 1, 2014.
- Debt and liquidity: Current and long-term debt and other borrowings totaled $12.776 billion at October 31, 2015 ($825 million current and $11.951 billion noncurrent). The company had a $2.25 billion revolving credit facility, with no borrowings outstanding, and reported compliance with debt covenants. Current assets were $15.204 billion and current liabilities $13.858 billion.
- Shareholder returns: Target repurchased $2.182 billion of shares in the first nine months and paid $1.017 billion in dividends. It had repurchased 77.2 million shares for $5.3 billion under its expanded $10 billion authorization through October 31, 2015.
Material changes and unusual items
- Sales increased 2.1% in Q3 and 2.5% year to date. Q3 GAAP continuing-operations EPS declined 7.9%, while adjusted EPS increased 8.6%. Year-to-date GAAP and adjusted continuing-operations EPS rose 27.7% and 16.9%, respectively; the prior-year comparison included a $285 million pretax debt-extinguishment loss.
- Q3 continuing-operations earnings were lower despite sales growth. Management cited pressure on gross margin from higher digital sales and pharmacy reimbursement, partly offset by favorable sales mix; cost savings and lower marketing expense helped reduce the SG&A rate.
- Target recorded $135 million of restructuring charges in the first nine months, principally for headquarters workforce reductions, and $39 million of impairment charges related to noncore operations. These items were excluded from segment results and from adjusted EPS.
- Canada exit results included $37 million of income from discontinued operations year to date, compared with a $485 million loss in the prior-year period. The current-period result included tax benefits and exit costs; it should not be treated as recurring continuing-operations profit.
- Target recorded $38 million of data-breach-related expense in the first nine months, with a $114 million accrued liability and $55 million insurance receivable at October 31. Since the breach, cumulative expenses were $290 million, offset by $90 million of expected insurance recoveries.
Outlook, contingencies and risks
- CVS transaction: Target agreed to sell its pharmacy and clinic businesses to CVS for approximately $1.9 billion, subject to regulatory approval and other conditions. At closing, Target estimated a pretax gain of $500–$550 million and deferred income of about $800 million to be recognized over the stores’ 23-year weighted-average remaining useful life. Estimated after-tax proceeds of $1.3–$1.4 billion were expected to fund retained net liabilities and shareholder returns. Target anticipated the transaction would be EPS-accretive after closing and improve ROIC by at least 50 basis points over time. No closing had occurred as of the filing.
- Canada claims: Target said it could not reasonably estimate losses beyond its recorded accrual for claims, primarily involving lease guarantees, and future estimate changes or ultimate payments could be material to future results. A November 23, 2015 settlement covering leases representing about 30% of the recorded accrual was materially consistent with the accrual.
- Data breach: Pending matters included financial-institution litigation, a Canadian action, shareholder suits, and government investigations. The company expected remaining payment-card-network matters to settle on terms consistent with its accrual, but outcomes remain uncertain.
- Liquidity and guidance: Management said liquidity sources should be adequate for operations, investment, Canada-exit and data-breach obligations, dividends, and repurchases for the foreseeable future. The filing provides no broad quantified earnings guidance. It cautions that quarterly results and cash flows are seasonal and not necessarily indicative of full-year results.
- Management reported no material changes to the risk factors in its prior Form 10-K and no material changes in primary market-risk exposures. Actual results could differ from forward-looking expectations, including because of transaction-closing conditions, guest response, the CVS relationship, and litigation or settlement outcomes.
Important facts for investors to verify
- Confirm the correct reporting period: the filing is for Q3 2015, notwithstanding the request metadata’s “2014 Q3.”
- Track regulatory approval, closing timing, proceeds, and realized benefits of the CVS sale; its projected gain and operating effects were estimates.
- Monitor Canada liquidation recoveries and lease-guarantee claims, including whether losses exceed recorded accruals.
- Follow data-breach settlements, litigation, investigations, and insurance recoveries against the recorded liability and receivable.
- Assess whether comparable-sales growth and cost savings can offset digital-channel, pharmacy-reimbursement, and other margin pressures, while considering the cash used for repurchases and dividends.