Target Corporation — Form 10-Q Summary
Period clarification: The filing covers the quarter ended November 2, 2013, and the nine months ended that date. Although the request metadata says 2012 Q3, the filing itself is for fiscal 2013 Q3; comparative figures are for periods ended October 27, 2012.
Business context and reporting period
Target operated U.S. and Canadian segments. Its March 2013 sale of the U.S. consumer credit card portfolio to TD Bank Group changed its reporting: Target continues servicing and marketing the accounts and receives profit-sharing income, while TD owns, funds and underwrites the receivables. Target opened 23 Canadian stores in the quarter, bringing its Canadian store count to 91. It reported opening 33 additional Canadian stores after quarter-end, completing its stated goal of 124 Canadian stores by year-end 2013.
Key financial results
| Metric | Three months ended Nov. 2, 2013 | Comparable 2012 period | Nine months ended Nov. 2, 2013 | Comparable 2012 period |
|---|---|---|---|---|
| Sales | $17.258 billion | $16.601 billion | $51.081 billion | $49.589 billion |
| Total revenues | $17.258 billion | $16.929 billion | $51.081 billion | $50.575 billion |
| Net earnings | $341 million | $637 million | $1.451 billion | $2.038 billion |
| Diluted EPS | $0.54 | $0.96 | $2.26 | $3.06 |
| Adjusted diluted EPS, non-GAAP | $0.84 | $0.90 | $3.08 | $3.12 |
| Cash provided by operations | Not presented as a quarterly figure | $4.753 billion | $3.348 billion |
Quarterly comparable sales rose 0.9%, versus 2.9% in the prior-year quarter. Transactions declined 1.3%, partly offset by a 2.2% increase in average transaction amount. For the nine months, comparable sales rose 0.5%, versus 3.7%.
The U.S. segment reported quarterly sales of $16.925 billion and EBIT of $977 million, down 11.4% from $1.104 billion. The Canadian segment recorded sales of $333 million and an EBIT loss of $238 million. Its nine-month EBIT loss was $612 million. U.S. gross margin rate was 30.0% for the quarter, down from 30.3%; U.S. SG&A expense rate was 21.2%, up from 20.5%.
Financial position, liquidity and material changes
- At November 2, 2013, cash and cash equivalents were $706 million; current assets were $13.153 billion and current liabilities were $14.551 billion.
- Current and long-term debt and other borrowings totaled $14.787 billion ($2.122 billion current and $12.665 billion long-term), down from $18.554 billion at October 27, 2012. Nine-month cash financing included $3.453 billion of long-term debt reductions.
- Operating cash flow increased to $4.753 billion from $3.348 billion. It included $2.703 billion of proceeds on sale of receivables originated at Target; investing cash flow included $3.002 billion of proceeds on sale of receivables originated at third parties. The company reported $5.7 billion total cash consideration for the portfolio sale.
- Investing activities provided $311 million, compared with $2.025 billion of cash used in the prior-year period. Capital expenditures were $2.839 billion, up from $2.338 billion.
- Financing activities used $5.146 billion, including $734 million in dividends and $1.461 billion in share repurchases. The company did not repurchase shares in the quarter, citing performance and its aim to maintain a strong investment-grade credit rating.
- The $391 million gain on the credit-card portfolio sale and $445 million loss on early debt retirement materially affected reported results. Nine-month net interest expense was $965 million, including the debt-retirement loss, versus $558 million.
Outlook, management commentary and risks
Management reported adjusted quarterly EPS of $0.84 and said GAAP EPS of $0.54 included higher-than-expected Canadian-segment dilution of $0.29. It attributed Canadian performance to lower-than-anticipated sales, excess inventory clearance and supply-chain start-up challenges; Canadian SG&A also included start-up costs. Management cited U.S. seasonal markdowns and growth initiatives as pressures on quarterly gross margin, and continued technology and distribution investment as a factor in higher SG&A.
The filing provides no specific full-year earnings or sales guidance. Management said liquidity should be adequate for operations, expansion, strategic initiatives, dividends and share repurchases. It reported a $2.25 billion committed revolving credit facility, extended to October 2018, with no amounts outstanding; it expected to remain in compliance with debt covenants. The filing cautions that access to, and cost of, debt financing depend on capital-market conditions, operating performance and credit ratings. Credit ratings were Moody’s A2/P-1, S&P A+/A-1 and Fitch A-/F2 for long-term debt/commercial paper. Management reported no material changes to previously disclosed risk factors or market-risk exposures.
The $143 million remaining beneficial-interest asset from the card sale is valued using forecasts of portfolio performance and a discount rate; management disclosed sensitivity to changes in those assumptions. The filing states that quarterly results may not indicate full-year results because of seasonality. Disclosure controls were deemed effective, and no material change in internal control was reported.
Important facts for investors to verify
- How much of reported and adjusted earnings reflects recurring U.S. retail performance versus the card-sale accounting, debt-retirement loss, tax items and Canadian start-up costs.
- Whether Canadian sales, inventory clearance and supply-chain execution improve, and how long segment start-up losses persist.
- Whether comparable-sales momentum, transaction trends and margins recover amid markdowns and ongoing investment.
- The quality and sustainability of operating cash flow, including the effect of receivables-sale proceeds, capital spending and debt repayment.
- Debt, liquidity and capital-return plans, including the conditions for resuming share repurchases while maintaining the stated credit-rating objective.
- The assumptions underlying the beneficial-interest asset and future profit-sharing income from TD.